
Book — :g^_^ 

GoipghfN" 



COPYRIGHT DEPOSIT. 



ECONOMICS 



•The^y^o. 



ECONOMICS. 



*»\ 



BY 



FEANK W. BLACKMAR, Ph. D., 

Professor of Sociology and Economics in the University of Kan$at. 



THE MACMILLAN COMPANY 

LONDON: MACMILLAN & CO., Ltd. 

1907 

All rights reserved 



' LIBRARY of CONGRESS ' 
Two Copies Received 

MAh 26 1907 

•x, SopyriPtW Entry j 
CLASS ^ XXC:, No, 

/r;SL ^/7 

'COFi' B. '• 






COPTBIOHT, 190O, 

By CEANE & CO. 

COPYBIGHT, 190T, 

bt the macmillan company. 



First printed elsewhere. New edition January, 1907. 



Notinooti )^r(8S : 
Berwick & Smith Co., Norwood, Mass., U.S.A. 



vV 



CONTENTS. 

BOOK I. 

Nature and Scope of Political Economy. 

Chapter I — Nature and Development of Economic Life. — Na- 
ture of economic life. — Unconscious cooperation of society. 
— Simplicity of early economic life. — Hunting and fishing. 
— Domestication of animals. — Agriculture. — Manufactures. 
— Trade. — Commerce. — Economic organizations. — Industrial 
stage. — Industrial revolution. — Free competition. — Compe- 
tition in groups. — Organization of capital. — Labor organiza- 
tions. — The state and industry 17 

Chapter II — The Nature and Definition of Political Economy. 
—Political economy treats of economic life. — Political econ- 
omy arises from concrete economic life. — Principles arising 
from man's economic activity. — Relation of man to wealth- 
getting and wealth-using. — "Wide range of economics. — Tech- 
nology of wealth-getting. — Creation of utilities. — Principles 
and laws of political ecoliomy. — Political economy is a sci- 
ence. — Definition of political economy. — Positions assumed 
by Adam Smith and his followers. — Trend of modern eco- 
nomics. — Economic fact and theory 33 

Chapter III — The Scope and Methods of Political Econom,y. — 
Field of political economy. — Boundary of the science is sub- 
jective. — Narrow conception of the science. — Liberal concep- 
tion. — Outline of economics. — The pure science. — Concrete 
economics. — Practical economics. — Problem of political econ- 
omy. — Mistakes in terminology. — Ethics and economics. — 
Politics and economics. — Private and public economics. — So- 
ciology and economics. — Effect of social organization. — Ob- 
jects sought in political economy. — Methods of study. — Ref- 
erences 42 

(3) 



4: CONTENTS. 

BOOK IL 

Production, Distribution, and Consumption. 
PART I. 

FAOTOKS AND PROCESSES OP PKODUOTION. 

Chapter I — The Nature of Production. — Unity of the economic 
process. — Character of production. — Creation of wealth. 
— Who are producers. — Nature of wealth. — Various methods 
of creating wealth. — Different ways of creating value. — Va- 
rious factors of production. — Relative conditions 61 

Chapter II — Land as a Factor in Production. — Land or nature 
the first consideration. — Bounties of nature. — Offices of land. 
— Civilization and the land question. — Population and land. 
— Law of income from agriculture. — Limited returns. — Ex- 
tension of territory. — Land area. — Transportation and agri- 
culture. — Policy of the United States. — Monopoly in land. — 
Agricultural area in the United States. — Variety of agricul- 
tural products. — Economic effect of machinery. — Corporate 
farming. — ^Irrigation. — Effect on prices. — General benefits. 
— Forests and fisheries. — Land tenure. — References 75 

Chapter III — Labor as a Factor in Production. — Service of 
labor. — Extent of the labor force. — Quality of the labor 
force. — Various grades of labor. — Division of labor. — Co- 
operation of labor. — Increased productivity of labor. — ^Im- 
proved condition of labor. — Labor organization. — Protection 
of labor. — Labor laws. — Eight-hour law and its effect upon 
production. — Restriction of immigration. — References 101 

Chapter IV — Capital as a Factor in Production. — Nature of 
capital. — Non-capital wealth. — Saving and abstinence. — 
Fixed capital and circulating capital. — Specialized and free 
capital. — Pure and concrete capital. — Accumulations of cap- 
ital. — Momentum of capital. — Economic significance of cap- 
ital in production. — References 114 

Chapter V — Production Lnfluenced by Social Organization. — 
Private organization. — The firm. — The corporation. — Trusts 
and combinations. — Effect of organized labor on production. 
— Effect of political organization on value. — Increased pro- 
ductivity on account of organization. — References 122 



CONTENTS. O 

PART II. 

DISTRIBUTION OP INCOME. 

Chapter 1— Principles of Distribution.— iiiet product.— Na- 
ture of distribution. — Divisions of net product. — Undivided 
net product. — Law of equal returns. — Dynamic law of distri- 
bution. — How the gross product is distributed. — Rights of 
property. — Monopoly privileges. — References 131 

Chapter II — Eent as a Factor in Distribution. — Rent in gen- 
eral. — Contract rent and economic rent. — Cause of rent. — 
Manner in which rent arises. — Difference in the fertility of 
soil. — Favorable location. — Limited returns to agriculture. 
— Margin of cultivation. — Prices and rent. — Rent does not 
enter into the cost of production. — Rent and free land. — 
Economic significance of free land. — References 153 

Chapter III — Wages as a Factor in Distribution. — Labor and 
the cause of wages. — Pure wages distinguished from gross 
wages. — Real and nominal wages. — "Wage-fund theory. — De- 
termination of the rate of wages. — Residual-claimant theory, 
— Iron law of wages. — Scientific law of wages. — Competing 
groups. — Influence of labor organizations on wages. — Busi- 
ness sense and wages. — Philanthropy and wages. — Eight- 
hour day and its effect on wages. — Gradual increase in wages. 
— Improvement of wages by* legislation. — Economic signifi- 
cance of wages. — References 164 

Chapter IV — Interest as a Factor in Distribution. — Nature of. 
interest. — Economic interest and loan interest. — Develop- 
ment of theories of interest. — Intei'est as an economic factor 
in distribution. — References 175 

Chapter V — Profits. — Gross profits. — Pure profits. — Competi- 
tion and profits. — The managing class. — Profits and rent. — 
Pure profits and market prices. — Monopoly profits and mon- 
opoly prices. — References 187 

Chapter VI — Cooperation and Profit-Sharing as Processes of 
Distribution. — Nature of cooperation. — Distributive coopera- 
tion. — Productive cooperation. — Distributive cooperation in 
England. — Productive cooperation in England. — Coopera- 
tion in the United States 193 



O CONTENTS. 

Ohaptbr VII — Labor Organizations. — Origin of labor organi- 
zations.— Development of trade unions. — Knights of Labor. 
— Objects of trade unions. — Mistakes of unionism. — Result 
of strikes. — Influence of trade unions on wages. — Effective- 
ness of labor organization. — Arbitration and conciliation. — 
References 218 

Chapter VIII — The Doctrine of Socialism and the Present Eco- 
nomic System. — The claims of socialism. — Adjustment of so- 
cial order. — Greek ideal. — Roman practice. — Thomas More. 
— Prevalence of old systems. — Modern communism. — Etienne 
Oabet. — Modern socialism. — Fourier. — State socialism. — An- 
archism. — German socialism. — Socialism in America. — The 
inadequacy of socialism. — Reforms proceed from local gov- 
ernment. — Nature of progress. — No formula for reform. — 
References 239 

PART III. 

CONSUMPTION. 

Chapter I — Nature of Consumption. — Consumption regulates 
production. — Consumption inseparable from production. — 
Variety of human wants. — Degree of want. — Satisfaction of 
economic wants. — Immediate consumption and final con- 
sumption. — Productive consumption. — Consumer's profits. . 269 

Chapter II — Consumption and Saving. — Analysis of consump- 
tion. — Engel's law. — Inducements to save. — Spending and 
saving. — Luxury. — Economic expenditure and waste. — De- 
sirability of saving. — Reform of consumption. — National 
consumption. — Sweating system. — Waste and consumption, 275 

BOOK III. 

Exchange and Industry. 

Chapter I — Utility and Demand. — Struggle for wealth. — 
Utility. — Demand schedule. — Law of demand. — Market de- 
mand. — Competition 293 

Chapter IE — Value. — ^Definition. — Differences of opinion. — 
Free goods and economic goods. — Value as index of utility. 
— Theories of the cause of value. — Utility the cause of value. 
— Objective and subjective value. — Intrinsic value 300 



CONTENTS. I 

Chapter III — Price. — Definition. — Manner in which market 
price is established. — Market interferences. — Laws of sup- 
ply. — Normal price. — Limitation of prices. — Cost of produc- 
tion and normal price 310 

Chapter IV — Money. — Beginnings of exchange. — Early his- 
tory of money. — Kinds of money. — Functions of money. — 
Measure of value. — Standard of value. — Deferred payments. 
— Multiple standard. — Storage of value. — Principles of cir- 
culation. — Amount of money needed by a nation. — Monomet- 
alism. — Bimetalism. — Paper money. — Paper money and 
bank notes. — Monetary history of the United States 323 

Chapter V — Credit and Banking. — Credit. — Definition. — In- 
strumentalities of credit. — Credit and value. — Advantages 
of credit. — Credit creates capital. — Effects of overstrained 
credit. — Inflation of the currency. — Banking. — Banks as cen- 
ters of business. — Rise of banking. — What constitutes a 
sound banking system. — Bank of England. — Bank of France. 
— National banks of the United States. — Organization and 
regulation. — Canadian banking system. — Savings banks. — 
Postal savings banks 343 

Chapter VI — Processes of Exchange. — Organization of ex- 
change. — Importance of exchange. — Means of exchange. — 
The market. — Domestic exchange. — Foreign exchange. — In- 
ternational exchange 357 

Chapter VII — Commercial Crises and Panics. — Definition. — 
Course of trade in depression. — Trade cycle. — Movement of 
prices. — Warnings of an approaching panic. — Causes of low 
prices. — Protective tariff and panics. — History of panics in 
the United States. — Management and prevention of panics. . 369 

Chapter VIII — Speculation. — Trade in securities. — Arbitrary 
corners in the market. — Speculation in processes of distri- 
bution. — Illegitimate speculation 396 

Chapter IX — Transportation. — Effects of transportation. — 
Prices equalized. — Equalizing industry. — Economic value of 
cheap transportation. — Advantages of water transportation. 
— Railroad problems. — Water transportation neglected. — 
Abuses of railroad management. — Railroad rates. — Railroad 
commissions. — Abuses of monopoly profits. — References 407 

Chapter X — The Commerce of Nations. — The Advantages of Com- 
merce. — Trade among Primitive Peoples. — Commerce of Ancient 
Nations. — The Phcenicians.— Mediscval Commerce. — Nature of 



CONTENTS. 

Mediaeval Commerce. — Modern Commerce. — The Mercantile Sys- 
tem. — National Competition. — The French and the English. — Re- 
cent Commerce. — American Carrying Trade. — Development of 
American Commerce. — Causes of Commercial Success. — Principles 
of International Trade 420 



BOOK IV. 
Public Economics. 

Chapter I — Bestrictive Measures. — Free trade and free com- 
petition. — Mercantilists. — Physiocrats. — Modern restrictions 
upon industry and trade. — Legislation in favor of labor. — 
Legislation in favor of commerce. — Legislation in favor of 
industry. — Government restriction of monopolies. — Plane of 
competition. — Government should realize to the people the 
benefits of monopolies 443 

Chapter II — Public Control of Industries. — General manage- 
ment of industries. — Railroad commissions. — Government 
ownership of railroads. — Lavrs controlling corporations. — 
Municipal ow^nership of gas- and water-vy^orks. — Government 
management versus government ownership. — Disposal of 
public franchises. — Economic freedom demands restrictive 
laws. — The modern trust. — Government by injunction. — 
State socialism. — Significance of public economics 449 

Chapter III — Taxation and Revenue. — Relation of taxation 
to private economics. — Taxation a means of improving eco- 
nomic processes. — Public financiering. — Definitions. — Pur- 
poses of taxation. — Canons of taxation. — Just and equitable 
taxation. — Incidence of taxation. — Classification of taxes. — 
Poll tax. — Income tax. — Real property tax. — Personal prop- 
erty tax. — Franchise tax. — Inheritance tax. — Indirect tax . . 463 

Chapter IV — A Rational System of Finance and Taxation. — 
Irregular development of finance and taxation. — Imperfec- 
tions of modern taxation. — Methods of collecting revenues. 
— Double taxation. — Taxation of corporations. — Single tax. 
— Land and income tax. — Inequitable assessment. — Methods 
of collection. — Public expenditures. — The budget.— Public 
debts. — Imperfections of government machinery. — Refer- 
ences 488 



CONTENTS. 9 

BOOK V. 

Methods of Economic Investigation. 

Chapter I — The Field of Investigation. — Classification of 
library material. — Field work. — Historical investigation. — 
Scope of economic investigation 511 

Chapter II — Mode of Procedure. — Economic purpose. — Gath- 
ering material. — Accounting and comparing. — Examples of 
methods of investigation. — The labor question. — Railroad 
rates. — Interstate commerce lavr. — Eailroad accidents. — Ca- 
nals and their relation to railroads. — Productive cooperation 
in England. — Condition of packing-house employees. — Mu- 
nicipal government of Berlin. — Prussian railroad system. — 
List of topics for investigation 517 



PREFACE. 



The object of this book is to present a complete working 
manual for students and instructors. In its preparation 
the writer has aimed to cover the entire field of economics 
and to present all of the elements of the science in a 
clear and concise manner, hence he has made no attempt 
to elaborate particular theories, believing it to be better 
to present only principles that have become permanently 
established. 

For it is conceded by all able instructors of economics 
that the controverted points, involving long and perhaps 
tedious discussion and analysis, should be studiously 
avoided by those making a formal beginning of the 
science. It is also considered best to give the beginner 
a survey of the entire field before allowing him to enter 
upon special studies. These points have been carefully 
observed by the writer in his class-room and in the prepa- 
ration of this book. The arrangement of the subject- 
matter in the book corresponds to the order of instruction 

in the class-room. 

(11) 



12 



PREFACE. 



On account of the wide scope of the book it is of a 
necessity much condensed^ but this does not detract from 
its qualities as a model text-book, which should consist 
of a well-arranged course of study, with the leading 
principles of each subject presented in short paragraphs. 
The text is thus readily supplemented by library reading, 
and investigation. As a first book should be clear, the 
writer has endeavored to present every economic topic 
in a fair and proportional manner, and at the same time 
to observe a simple and direct style. 

Owing to the excellent bibliographies now published 
it is no longer necessary to make an extended list of 
references in an ordinary text, therefore only a few of 
the most common standard works have been referred to 
at the close of each chapter, which may furnish parallel 
and explanatory readings on the subjects included in the 
chapter. 

Book V is placed in the text for the purpose of 
encouraging concrete investigation, a practice greatly 
needed in these days in order to render economics of 
great public service and to verify and illustrate economic 
principles. With this text in hand, accompanied with 
more extended discussions by the instructor of special 
subjects such as the theories of value, rent, interest, wages. 



PREFACE. 18 

profits., and distribution; and of transportation., taxation., 
money., trade unions., and labor organizations., and with 
collateral reading, the student will have a thorough prep- 
aration in the elements of economics. 

The writer wishes to acknowledge the valuable assist- 
ance of Professor R. W. Cone, of the University of Kan- 
sas, in reading manuscript and proof-sheets. 

FRANK W. BLACKMAR. 
Unitebsitt of Kansas. 



BOOK I. 



THE NATURE AND SCOPE OF POLITICAL ECONOMY. 



(16) 



CHAPTER I. 

NATURE AND DEVELOPMENT OF ECONOMIC LIFE. 

Nature of Economic Life. 

A part of the general activity of society is called the 
economic life, because it treats of the efforts of man to 
obtain and use material things called economic goods. 
There is, strictly speaking, but one life of man, including 
his entire activities, individual and social. But in the 
consideration of the different phases of this life it is con- 
venient to designate a social, individual, intellectual, 
moral, religious, political, or economic life. Economic 
life underlies all other activities. It represents man's 
struggle to improve his material welfare. It began with 
the struggle to satisfy hunger, and to protect against cold, 
and has continued as the constant factor in the struggle 
of the race for supremacy. While the economic life may 
not be considered the most cherished part of our higher 
civilization, it is the most essential. It is a great means 
to a greater end, and has the most important consideration 
of any phase of human life. 

Observe the activities of modern society in which we 
live, and it will be found that each individual is struggling 
to obtain for himself a larger share of economic goods. 
The daily wage-earner, the man working on a salary, the 
manager of the business, the capitalist who furnishes the 
means of business, and the person endeavoring to make 
the world better, each is striving to obtain economic goods 
-2 (17) 



18 ECONOMICS. . 

or wealth to satisfy his ends. Indeed the larger part of 
the time of man is spent in obtaining food, clothing, and 
shelter, for these wants must be satisfied before the higher 
products of civilization can be realized. Even should 
literary culture, aesthetic taste, religious fervor, or philan- 
thropic sentiment represent the fruitage of the best life, 
yet the struggle for material goods is the uncompromising 
essential of human existence. This activity in obtaining 
and using material goods is called the economic life. 

Unconscious Cooperation of Society. 

The economic life is both individual and social. Man 
works independently to satisfy wants, or he works with 
his fellows for the same purpose. The older is civilization 
and the more prolonged the struggle, the more men work 
together or cooperate in the production of economic goods 
or wealth. In one sense it is well to speak of the individual 
power and the independence of man; in another it is 
necessary to consider him as dependent upon his fellows. 
He might say: "By my own efforts have I obtained all 
this wealth; by my own efforts have I accumulated this 
store of knowledge and risen to this position in life." Yet 
from another standpoint it is true that without the coopera- 
tion of his fellows he would have accomplished but little, 
for while he has been seeking his own interests he has 
been unconsciously cooperating with his fellows. There is 
such a division of labor in the accumulation of wealth that 
a man is dependent upon the whole world for the wealth 
which he enjoys. 

Consider the simple life of an ordinary laborer, and 
while his services are essential to the production of social 
wealth, observe how much he depends upon others for what 



ECONOMICS. 19 

he uses. From the tailor or clothier he receives his cloth- 
ing ; from the grocer or butcher his food ; and. from the 
furniture dealer the articles for his household. But follow 
out the conditions further, and we see that the tailor de- 
pends upon the weaver, and the weaver upon the farmer 
who supplies wool and cotton. In each case the farmer, 
weaver, and tailor are dependent upon the baker, cloth- 
ier, and all others in connection with them. The grocer 
obtains his flour from the miller, and the miller the wheat 
from the farmer, and the machinery to run the mill 
from the machinist. The grocer obtains sugar from 
the refinery, which receives it from the factory and plan- 
tation. Even the spices, which form rather an insignifi- 
cant part of the necessaries of life, have passed through 
many groups of hands before they are furnished to the 
consumers. Thus the ordinary laborer has the whole world 
waiting on him in exchange for the labor he furnishes. 

Thus all the activities of the economic life are woven 
together into an intricate web, and the individual who 
apparently works alone, independently seeking his own 
welfare, is in reality a cooperative creature, working in 
connection with thousands in providing the necessaries 
and luxuries of life. His service to the Avorld may be 
nothing more than polishing a boot-heel or cutting bolts 
in the machine shop, but for this service he receives his 
reward in a multitude of ways. 

Competing with his fellows in a special occupation, he 
cooperates with them in general production. Competition 
of class with class is after all but a method of the division 
of labor, for while the farmer class is furnishing the raw 
material for other groups, farmers are receiving clothing 
and implements and manufactured articles from other 



20 ECONOMICS. 

groups. The independence of the farmer has become pro- 
verbial only because he possesses the means of the food- 
supply and furnishes the raw material, and possibly be- 
cause, having the food-supply and raw material, he may 
become a manufacturer and supply his needs in a meager 
way. But in the complexity of modern life he is no more 
independent than members of other groups. He may iso- 
late himself and live a slow, independent, and non-pro- 
gressive life, if he will, but he is not apt to turn civilization 
back upon itself in this way. He is as much affected by 
division of labor as other groups, and indeed on account 
of the modern appliances to farming it may be said eco- 
nomically that he is a manufacturer of grain, fruit, vege- 
tables, wool, cotton, and sugar. 

Conscious Cooperation of Society. 

Although the cooperation of individuals in economic life 
began unconsciously, it has led to the necessity of con- 
scious cooperation. Men lay plans and work together in 
the production, distribution, and exchange of wealth. This 
cooperation is mostly carried on in groups of individuals 
which have some special interests in the same thing. Thus, 
a group of laborers unite in an attempt to advance their 
own wages and their own interests, and to receive a 
larger share of the net product of industry. Another 
group of laborers unite in a special enterprise of creating 
a given line of economic goods, such as boots and shoes, 
while another group of people unite in a cooperative in- 
dustry of trade, and still another group unite and form a 
bank, by which they aid the processes of exchange in 
wealth-creating. Others unite in mining enterprises, rail- 
road-building, or other great industries where one person 



ECONOMICS. 21 

feels unable to cope with circumstances; and finally we 
may say the state itself cooperates with all industries 
within the boundary of its own jurisdiction. Thus we 
have, besides the involuntary or unconscious cooperation 
of individuals in the production of wealth, an organized 
or conscious cooperation of individuals in groups carrying 
on special industries. This latter tends to enforce more 
clearly the idea of economic interdependence of indi- 
viduals. 

Simplicity of Early Economic Life. 

At first the economic life of man was very simple. 
Single-handed he began the struggle to satisfy hunger and 
protect himself against the cold. In primitive social con- 
ditions man's selfish nature was laid bare. He began his 
career by finding things, and the finder was possessor and 
owner if he had the strength to defend his property. Roots 
find berries and the leaves of trees, with other bits of food 
that fell to his lot, he devoured to sustain life. He was but 
a wanderer, living an uncertain, nomadic life, with no 
settled place of abode and without regularity of movements. 
Life was precarious, for he was gorged at one time and 
starved at another. His shelter was often temporary; 
rocks and caves or rude huts of bark and branches were 
his habitations. Even his improvised garments gave in- 
complete protection to the body from the rigors of the cold 
and the heat of the sun. 

Hunting and Fishing. 

Later, man learned to catch fish and game, and hunted 

or fished in packs or hordes. These new industries had 

immense consequences in the development of the human 

race. In the first place, they gave additional food-supply, 



22 ECOisroMics. 

which left some leisure for the making of instruments and 
implements and the creation of better houses for pro- 
tection. An increased food-supply always gives to men 
means of improvement; it is the first step forward in 
material civilization. In the second place, it developed an 
adroitness or skill in the struggle for existence. The per- 
petual struggle in the accumulation of wealth has been 
along the line of the mastery of nature. As a man learns 
to master or outwit it, he adds the means of his own 
material welfare and develops intellect. And finally, it 
may be said that fishing and hunting led to association in 
wealth-producing, and finally developed unconscious co- 
operation in obtaining food. Implements were made and 
devices contrived by means of which to accomplish these 
ends with greater ease and certainty. 

Domestication of Animals. 
After a while man enters a higher state of existence, and 
increases his food-supply by the domestication of animals 
which furnish him meat and milk and service as well. 
This adds greatly to his leisure, and to a more complete 
social development. The race has multiplied into great 
family groups, which settle down in the more or less per- 
manent conditions to hunt and fish and tend their flocks. 
Wealth is now more easily created and consequently more 
abundant, and there is less necessity for want and strife. 
The social organization of men becomes more compact, and 
the conditions of labor begin to prevail. This leads to 
more definite cooperation in wealth-producing. 

Agriculture. 
Soon a new period of progress is entered upon as the 
knowledge of seed-planting and harvest leads to agricul- 



ECONOMICS. 23 

tiire. The fertile soil now adds to the food product and 
increases the means of human welfare, making possible 
a more perfect economic life. Man is rapidly becoming 
a cooperative animal. His residence becomes fixed, and 
his wandering ceases. Settled laws and customs prevail, 
and the tribal ownership of land gives security to all. 
More goods can now be acquired than are needed for bare 
subsistence, and the conveniences and comforts of life ap- 
pear. JSTew economic relations spring up, and the divisions 
of labor begin to be prominent as each follows a special 
occupation. In its effect upon civilization agriculture 
has a vast influence in developing a more perfect social 
life and a better political organization. 

Manufactures. 
With increased food-supply the desires of men for a 
variety of implements, instruments, wearing apparel, and 
a larger equipment of dwellings, demand the especial ser- 
vices of part of the community in manufactures. And so 
we find that individuals employ their whole time in the 
creation of certain lines of goods to exchange for goods 
of other lines. 

Trade. 

This creation of more goods than can be used by the 
producer leads to trade. The surplus goods of each indi- 
vidual of each group are now exchanged for articles more 
desirable, and barter, the first forai of exchange, appears. 
As society becomes more complex, the method of barter is 
too clumsy for carrying on the trade of different com- 
munities. This leads to the introduction of money, which 
becomes an instrument of exchange. Usually, money was 
some common commodity whose value was quite well 



24 ECONOMICS. 

known to all traders or exchangers of goods. By means of 
the use of money, trade was greatly stimulated, and conse- 
quently manufacturing increased. In seeking those arti- 
cles which are most desirable for money on account of 
convenience when large values must be considered, the 
tribes of the nations of the world finally adopted the 
precious metals as money. 

Commerce. 

The habit of exchanging surplus goods leads to the devel- 
opment of commerce, which brings a special group of 
people to attend to the work of trading. ]!^ot only do indi- 
viduals deal with individuals, but tribes with tribes, and 
nations with nations. Caravans are used on land and ships 
on sea for carrying the surplus goods, and each new ex- 
change stimulates desire and develops the energy of men 
in supplying wants already created. Thus does the eco- 
nomic life become broadened and the desire of men for 
more wealth becomes intensified. 

Economic Organizations. 

In the early period of development we find society 
arranging its own economic groups, — the agriculturists, or 
those who till the soil; shepherd class, or those who tend 
the flocks and herds ; and the trading or merchant class. 
But we find those who, on account of their skill, spend their 
entire time in the manufacture of goods. The two latter 
classes divide into many special groups, the traders deal- 
ing in a single article or group of articles, and the manu- 
facturers confining their skill to a single product or group 
of products. As economic society grows more complex, 
the manufacturers and traders group themselves in towns 
and cities. The farmers are usually collected in villages 



ECONOMICS. 26 

and country hamlets. Economic life shifts again, and the 
manufacturers and laborers in special industries live to- 
gether, and subsequently become organized into guilds, 
which represent the first artificial industrial organizations. 
As the number and kinds of industries multiply and the 
divisions of labor increase, society tends more and more to 
arrange itself in groups. The small towns and villages 
grow into great cities, which become the means of new 
associations. The guilds in these cities represent the or- 
ganization of the manufacturers and laborers in the same 
commodity or the same industry in one group for their 
own protection and for the advancement of their own in- 
terests. The importance of all these divisions of labor 
is seen in the rapid development of economic society in all 
branches. Wealth is rapidly increased by the facilities for 
its production and the excited desire of mankind every- 
where for a larger supply of economic goods. Men have 
more to live for, more to live upon, and yet are more de- 
pendent upon the exertions of their fellows for what they 
accomplish in the general processes of production. 

Industrial Stage. 
With the impetus now given to economic life, man enters 
upon what is known as the industrial stage, which con- 
tinues to the present. Prior to this, nearly all of the manu- 
facture of articles was dependent upon the muscular efforts 
of man and beast. Machinery was used to a limited extent, 
but the chief manufacture was by hand . However, the in- 
troduction of power manufacture was the beginning of a 
new industrial life. By the use of machinery and the con- 
trol of the powers of nature, rapidity of manufacture was 
increased a hundred fold. This caused the introduction 



26 ECONOMICS. 

of new methods of production, and changed to a great 
extent the conditions of economic life. 
Industrial Revolution. 

The result of the introduction of machinery was, that 
instead of the manufacturer working in his home, sur- 
rounded by his apprentices and journeymen, great fac- 
tories were established, with improved machinery, in which 
were congregated large groups of laborers who worked for 
wages. Buildings and machinery were provided by the 
combined efforts of capitalists, and laborers worked under 
the direction of a master. Economic society now arranges 
itself in new groups or classes: there are laborers, mana- 
gers, and capitalists. 

Under the old method goods were manufactured in the 
shop in small quantities and placed in stock for sale. 
Under the new method large quantities of goods are created 
in a single factory and sold to dealers. The laborers 
receive their remuneration in the form of a daily wage 
and supply their own homes, living apart from the manu- 
facturers and capitalists. In fact a large number of the 
manufacturers of the old method became laborers in the 
factories under the new. This was the formal beginning 
of the wage system which is nearly universal at present. 
The divisions and subdivisions of labor became so great 
that it took a large number of workmen to complete a 
single article. After it was necessary to have buildings 
and machinery to carry on industry, and as laborers could 
not furnish these without a system of cooperation, which 
had not been introduced, they were obliged to rely upon 
others called capitalists to construct buildings and furnish 
machinery and raw material, while they accepted a daily 



ECONOMICS. 



27 



remuneration for their services, called wages, taking no 
risks of loss and participating in no gains. The rapid de- 
velopment of manufacturing interests ^dth the use of 
steam and improved machinery, the increased facilities 
of transportation by means of canals, waterways, and rail- 
roads, caused such constant and radical changes in eco- 
nomic life as to be termed an industrial revolution. The 
large amount of business transactions brought about the 
credit system, and with it the banking industry. Manu- 
factured products increased enormously, the agricultural 
area was greatly extended, trade and commerce expanded 
in extreme proportions, divisions of labor were greatly in- 
creased. Facilities for transportation kept up with the 
general improvement in other lines, while industrial en- 
terprises reached greater and greater magnitudes. 

Free Competition. 

At this stage of progress another economic phase ap- 
pears. Under the old guild system prices were regulated 
largely by custom or by the consent of the guilds. As the 
guilds had much influence in the government of the cities 
this method of fixing prices became a law. There was 
known the just price and the fair price in the market, fixed 
by custom, or agreement, and finally by legal enactment. 
On account of the scarcity of labor at certain periods the 
wages varied to so great an extent that the price of labor in 
the market was also fixed by custom, agreement, or law. 

In the industrial stage these restrictions and barriers 
were broken down. All tradesmen and manufacturers 
now compete with their fellows in the market for the sale 
or purchase of goods, and prices are regulated by free 
competition. Laborers too seek the highest wages their 



28 ECONOMICS. 

services will bring, and wages, instead of being established 
by custom or law, are now regulated by the law of supply 
and demand or by market rates. The abuses which crept 
in through the attempt to regulate wages and prices by law 
brought forth a great reaction. It was finally urged by 
economic thinkers that if each man will seek his individual 
interests he will best promote the common interests and 
the common good of society, a doctrine true only in part, 
for the immediate interest of the individual may not always 
be his ultimate interest and consequently not the ultimate 
interest of the community. But the famous " laissez-faire " 
assumption that government should cease to regulate 
prices or wages by law after it had expanded into the 
doctrine of non-interference in economic processes, leaving 
all regulation to free competition, finally prevailed. For 
many years this was the prevailing doctrine, and indeed 
the actual practice in England, and became the formal basis 
of modern political economy. The rapid economic changes 
occasioned by what is known as the industrial revolution 
brought great injustice by the irregularities of industry, 
and in many instances much suffering occurred because 
people could not adjust themselves to the new conditions 
caused by these sudden changes. Also, the rapid produc- 
tion of wealth led to its excessive power, created discontent 
thereby, and finally led to a reaction in favor of restrictive 
measures. Experience demonstrated to many that the 
largest conceivable amount of economic freedom was only 
secured to all by wise restrictive measures. This is as 
true of economics as of politics; so it was that labor 
organizations sprang up for the protection of the rights 
of the laborers; just laws are passed protecting laborers 



ECONOMICS. 29 

and capitalists, securing the rights of both, and greater 
activity on the part of the state in the supervision of 
industry and in the protection of the industrial and eco- 
nomic interests of its subjects has obtained. 
Competition in Groups. 

General competition, which began so severely between 
individuals, finally changed, through the process of shift- 
ing industry, into competitive groups which are consid- 
ered as high-pressure and low-pressure groups. That is, 
while all wage-earners are competing with one another 
for position, this competition becomes intense as it is nar- 
rowed down to a single industry, and reaches its maxi- 
mum when several are competing for the same occupation 
in a given factory. Thus the hands in a cotton mill 
have a very general competition with the hands in a 
woolen mill, and much less with the hands of an iron 
foundry, but the cotton-mill hands are in a sharp competi- 
tion with one another, and this becomes a high-pressure 
group when there is a large number of laborers in the 
cotton industry seeking employment, in comparison with 
the number of places to be filled ; and when a single occu- 
pation in the mill is considered, this competition becomes 
narrow and intense. Thus in the iron factory we find 
another competing group of laborers, and within this many 
other smaller separate competitive groups. 

The whole effect of the division of labor at first is to 
render it immobile. Each individual seeking for employ- 
ment learns to do one thing well, which may be a small part 
of the manufacture of a single article. If he is thrown out 
of employment he must seek a place in other competing 
groups of the same industry. Failing in this, he will seek 



30 ECONOMICS. 

other employment in the same groups, and failing in this, 
he will endeavor to enter other industries, for which he 
has no skill; consequently he must take a lower position. 
But failing in all of these, he seeks employment among 
the great body of unskilled laborers. The secondary 
effect of the excessive division of labor is to break down 
the barriers of groups, because the very minuteness of the 
division makes it possible for the laborer to prepare him- 
self in a short time for the occupation; hence, laborers 
may more readily pass from one group to another. 

The division of labor has become so minute that it 
takes a man of intelligence but a little while to learn how 
to polish a boot-heel, or a woman to make a certain portion 
of a shirt, or of a laborer to attend a bolt-cutting machine. 
Therefore, while the introduction of the so-called labor- 
saving machinery has a tendency to disarrange competi- 
tive groups and throw laborers out of employment, the 
minute division of labor allows them to shift more readily 
from one industry to another. 

Org^anization of Capital. 

The introduction of power manufacture has brought 
about the need of carrying on productive enterprises on 
a great scale, and this has led to the organization of capi- 
tal, usually in the form of corporations, for the manufac- 
ture of goods, the development of mines, the building of 
railroads and canals, and the purpose of trade. All this 
has tended to bring about a momentum in capitalistic 
production. The absolute necessity for the use of capital, 
and the fact that capital takes the initiative in all modern 
manufacturing processes, gives it an immense poAver in the 
modern economic life. The momentum of capital in itself 



ECONOMICS. 31 

is also great, and it has moved forward with unrelenting 
selfishness in seeking its own interests. Hence it is not 
on account of the undue influence of any individual or 
class of individuals, but on account of economic conditions, 
that the overweening power of capital exists. 

Labor Organizations. 

To offset this, laborers have organized themselves into 
groups to protect their own interests. They seek to meet 
the monopolistic power of capital with the monopolistic 
power of labor. While they realize that capital is essen- 
tial to modern productive processes, they also know that 
nothing can be done without labor. They claim that capi- 
tal has received more than its just reward of industry, and 
to obtain what belongs to labor they must act as a unit; 
that is, as a monopoly. They propose to raise the rate 
of wages by forcing employers to comply with their de- 
mands, and by shutting out of a given territory all com- 
petition of labor. These two facts of capitalistic and labor 
organizations have brought into the economic life many 
questions of great importance. Two forces whose interests 
are essentially the same in the process of production have 
become suddenly antagonistic on account of supposed dis- 
crepancy in distribution. But the combined influence of 
conscious and unconscious organization has tended to 
readjust economic conditions of life. 

The State and Industry. 
The apparent irregularities in the shaping of modern 
economic society caused by industrial organization has 
led many people to look to the state as the regulator of 
all industries, until the relation of private economies to 
public economics has become one of the great questions of 



32 



ECONOMICS. 



modern political economy. Fundamentally the state is 
the protector and regulator of all industrial cooperation 
in all economic enterprises. At least, its policy must be 
so directed as to secure the largest amount of economic 
freedom compatible with economic justice to all groups 
and classes. To what extent the state must go in industrial 
management to secure this end is one of the problems of 
modern economic life. At present the industrial revolu- 
tion, or more properly the industrial evolution, still goes 
on with ever-increasing rapidity, slowly changing the as- 
pect of modern economic life. IsTotwithstanding the tend- 
ency to government interference or regulation, the eco- 
nomic life rests to-day essentially upon the exercise of free 
competition. Industrial activities have been greatly multi- 
plied; industrial life has been greatly extended; wealth 
has increased in enormous proportions, until the study of 
economic life and the laws and principles controlling it 
has become of vital importance. 

References: Ely, E. T., Outlines of Economics; Ashley, W. J., 
English Economic History and Theory ; Cunningham, W., Growth 
of English Industry and Commerce ; Ingram, J. K., A History of 
Political Economy ; Toynbee, Arnold, Industrial Revolution ; 
Blackmar, The Story of Human Progress ; Carl Biicher, Industrial 
Evolution ; Ely, R. T., Studies in the Evolution of Industrial Society. 



ECONOMICS. 33 



CHAPTER II. 

THE NATURE AND DEFINITION OF POLITICAL 
ECONOMY. 

Political Economy Treats of Economic Life. 
Political economy considers the principles and laws 
of economic life, or, in other words, the principles involved 
in production, distribution, and consumption of wealth, 
and in fact all the activities of economic society, in what- 
ever direction they may operate. It has to do especially 
with wealth, and for this reason is sometimes called the 
science of wealth, for by this is meant the observation, 
classification, and logical arrangement of economic phe- 
nomena and the principles arising from man's wealth- 
getting and wealth-using capacities. But it seeks to inter- 
pret the phenomena that arise from man's entire economic 
activity. While the accumulation of wealth may be the 
primal and logical idea in political economy, it is better 
to place man in his economic activity in the foreground. 
He is the central figure in economic life, and the distribu- 
tion of wealth has become an important phase of political 
economy. The principle of distribution, too, is one of 
the most difficult and important of all within the scope 
of political economy. \^Tiile the production and distribu- 
tion of wealth must always be carefully considered, the 
effect of these processes on economic society must not 
be neglected. 
—3 



34 ECONOMICS. 

Political Economy Arises from Concrete Economic Life. 

It has been observed that in his attempt to obtain 
wealth, man has arranged himself in groups or classes. 
A multitude of industries have been developed which 
fall into two groups arising from manufacture or pro- 
duction of wealth, and from trade or the exchange of 
wealth. Production and exchange are dependent some- 
what upon the consumption of wealth by individuals, and 
the various departments of industry are characterized by 
the distribution of wealth or the amount of the net 
product which each one receives, whether he be laborer, 
landlord, capitalist, manager of business, or oooperator. 
A study of these various relations of man in the economic 
process has brought to light certain principles which con- 
trol the production, distribution, exchange, and consump- 
tion of economic goods. These principles form the main 
topic of political economy. They are ascertained through 
observation of concrete instances of social groups and 
social activities in the economic life. These principles 
are abstracted from the concrete, and become an inde- 
pendent body of knowledge or of science called political 
economy. 

Principles Arising from Man's Economic Activity. 

What then is the nature of the principles which arise 
from man's economic activity ? Political Economy would 
consider production not only an effect, but would find 
out its processes and the principles controlling it. It would 
seek not only to find the means of production, but the 
methods of production which yield the highest returns 
to human effort. It would discuss not only those fac- 
tors and powers engaged in production, but would find 



ECONOMICS. 36 

out the relative importance of each and the service each 
performs; it would seek also the effect of the actual re- 
turns to each factor. In so doing it would find that the 
attempt of man to satisfy wants has pursued a zigzag 
course and is followed by the laws of production, ex- 
change, and distribution. 

Relation of Man to Wealth-Getting and Wealth-Using. 

Seeking to obtain wealth is one of the primal conditions 
of economic life ; seeking to use it is another. It is the 
relation of man to these two ideas which lays the founda- 
tion of political economy. How society obtains wealth 
and how it uses it are the first principles. These ideas 
give rise to the multitude of conditions of life, and tend 
to demonstrate principles which may be formulated. 
Wide Range of Economics. 

Political economy, although a compact body of laws 
and principles, touches a wide range of subjects. It treats 
of the methods of increasing wealth and the distribution 
of the same among the various classes of producers; of 
the exchange of economic goods and of their consump- 
tion. It treats of capital and interest, labor and wages, 
of money and its circulation. In its broad scope it em- 
braces exchange, credit, and the principles of taxation. 
In considering the laws of wages it treats of strikes and 
combinations. In the consideration of the factors of pro- 
duction it has to do with social organizations and many 
other economic problems. But in all this it does not con- 
sider the technology of wealth-getting. 

Technology of Wealth-Getting. 

Political economy is interested in the production of 
coal and iron, but it does not deal with the technical pro- 



36 



ECONOMICS. 



cess of their manufacture and sale at a profit to the opera- 
tor. It may tell how a nation grows wealthy, but it will 
not instruct the individual in the process of the accumula- 
tion of goods on his own account. It is interested in the 
manufacture of goods, but it will not explain to a person 
the process of cotton manufacture, nor tell hoAv he can 
make a margin in wheat. It is interested in the wheat 
product of the country as a source of wealth, but has noth- 
ing to do with instruction in the best processes of agricul- 
ture. It makes no attempt to say whether a farmer should 
raise wheat or corn in a given year, or whether the manu- 
facturer should make a certain grade of goods for the mar- 
ket, but it does investigate the laws of supply and demand 
and the conditions of wealth-getting and wealth-distribut- 
ing to such an extent that a person studying these princi- 
ples may have a larger intelligence in the technology of 
wealth-getting. It does direct the thoughts toward the 
business world, and present many phases of the economic 
life with which the business man and the citizen should 

be familiar. 

Creation of Utilities. 

The production of wealth consists in the creation of 
utilities. Anything that is useful in exchange is economic 
wealth. Man cannot make new material; he can only 
change the form of that which already exists, making it 
more adaptable to human needs. The timber of the for- 
est is changed into furniture, buildings, and articles of 
use, and when thus changed these articles become wealth 
or economic goods. So too in the production of raw 
material on the farm, man cooperates with nature, and 
the substance of the soil and of the air is changed into 
corn and fruits ; under his direction and care, nature 



ECONOMICS. 37 

works for him. Whatever is used by man to satisfy hu- 
man needs is utility, is wealth. But political economy has 
to deal with those things about which we economize. 
Things in a state of nature may be beneficial to man as 
well as essential to his life and existence. That is, they 
may be so free, like sunshine and water, as not to be con- 
sidered as w^ealth. We economize about those things of 
which we have not enough without the effort of man. 
It is well also to distinguish between that which is useful 
merely and that which is beneficial. Many articles of 
wealth may be greatly desired by people and at the same 
time may not be beneficial to them nor conducive to the 
higher welfare. The whole process, then, of the creation 
of wealth consists in the change of form or in the change 
of place of goods, or indeed the change in the conditions 
surrounding wealth, which tend to enhance its value. 

Principles and Laws of Political Economy. 

Political economy, then, investigates the laws which 
arise from economic phenomena. It seeks to lay down 
guiding principles for the better management of public 
and private wealth. It is not all theory ; it is not specu- 
lation, but deals with principles and laws and their appli- 
cation. Through practice in wealth-getting people arrange 
themselves in economic groups representing both the in- 
dividual and the group in the process of the creation of 
wealth. These classes had no idea of creating a political 
economy or establishing laws for their own control, but 
unconsciously through long practice and habit there grew 
up certain usages which became the foundation of princi- 
ples controlling economic life as practiced by men in their 
relations to each other. These principles lie at the foun- 



38 ECONOMICS. 

dation of the practices of nations, in the creation of wealth, 
or, in production, distribution, and exchange. 

Political Economy is a Science. 

Political economy is a young science, scarcely a century 
old, and has all the defects and irregularities of a growing 
science. But just as chemistry grew out of alchemy, as 
astronomy came from astrology, and all science from the 
speculations of ancient philosophers, so a well-developed 
science of political economy has arisen from irregular 
economic life and unsystematic economic thought. Its 
claim to be a science rests in the fact that it is a classified 
and systematized body of knowledge. It has well-estab- 
lished principles and laws, and it follows scientific meth- 
ods in its investigations. Phenomena may be observed, 
facts collected and classified, and laws deduced in politi- 
cal economy as well as in chemistry, botany, geology, and 
other natural sciences. The laws of political economy 
might also be considered natural, — natural social, not nat- 
ural physical laws. They are not the results of human 
investigations, — they are the results of human activity. 
The chief difficulty arises from the fact that society con- 
stantly changes, while the elements of nature remain 
constant. Oxygen once discovered is oxygen the world 
over, wherever found, and always the same. ]S[ow the 
chemist in his experiments will always succeed if the con- 
ditions are right. So too will the economist succeed if the 
conditions are followed; the laws will operate with pre- 
cision. But the chemist can manipulate the elements of 
nature at will, the entomologist can dissect a bug, but the 
economist cannot well experiment upon society, though he 
may observe and classify its phenomena. But in every 



ECONOMICS. 39 

case, with the economist as well as with the chemist, con- 
ditions must be fulfilled or the law will not operate. The 
chemist has this advantage, — that he can change condi- 
tions ; while the economist must wait for society to change 
itself. 

Again, society is an organism which grows, not as a 
tree grows, in a passive state, but partly by the law of 
mind, by the avarice and desires of men who compose 
society. Therefore the economist looks for deflecting 
forces in the movement of society, wrought by man's intel- 
lect and will ; for example, the discovery and use of steam, 
which changed the whole economic aspect of society. But 
can economics determine the future by the application of 
its laws ? No more than any other science. Mathemati- 
cians studying the heavenly bodies can determine their 
shapes and motions, demonstrating with exactness their 
progress through the heavens ; but there is regularity in 
their movements. The movement of society, however, is 
that of an irregular curve, and while its general course 
may be determined, its exact movement is difficult to ascer- 
tain unless the deflecting forces can be estimated. 

Definition of Political Economy. 

Political economy has been defined as the science of eco- 
nomic life, or more especially, the science of the phenom- 
ena which arise from economic life. It treats of man 
in his wealth-getting and wealth-using capacity. It in- 
volves all the methods and principles of economic activity. 

The eiforts of man to satisfy wants by securing material 
objects may be called the economic life, and a systematic 
treatise of these efforts makes the science of economics. 
The terms "Political Economy" and "Economics" are 



40 ECONOMICS. 

commonly used interchangeably, while in reality there is 
a growing divergence in their meaning. The former par- 
took more of the nature of philosophy, with possibly some 
features of art, while the latter has broadened into a 
science; or as Political Economy has become more scien- 
tiiic and enlarged its scope it has taken on the name Eco- 
nomics. There is more or less contention as to which is 
the broader term. In this work Economics is considered 
rather broader, as it might include some items not 
especially and strictly included in the science. There 
are many conditions in which the two words may be 
interchangeable, and others in which it would seem better 
to make "Economics" the broader term. 

Positions Assumed by Adam Sm^ith and His Followers. 

Adam Smith placed wealth-getting in the foreground, 

and considered lightly distribution in its relation to labor. 

Ricardo, Senior, and others followed him, and shaped 

English Political Economy after this model. John 

Stuart Mill, of the school of Eicardo, Cairnes, and 

Smith, increased the importance of the distribution of 

wealth. But the great industrial revolution referred to 

.placed man in the foreground, making him the central 

figure of economic life, so that to-day the distribution of 

wealth has become one of the most important principles 

of economics. 

Trend of Modern Economics. 

Modern economics each year reaches a far different po- 
sition as it has a tendency to consider man in his entire 
economic life. It covers a broad field simply because 
man's economic life has broadened, and the science built 
from concrete phenomena follows the development of 



ECONOMICS. 41 

the phenomena. It has gone so far in the relation of 
man to wealth that it has considered his well-being. But 
in all this the principles of Political Economy wrought 
out on a basis of free competition have changed but little. 

Economic Fact and Theory. 
Various theories have been propounded about interest, 
rent, wages, and in fact all the various phases of economic 
life. These theories are based upon certain principles, 
or at least upon principles representing a separate body 
of laws distinct from the theories and recognized by every 
one. In the modern world we look about us and find a 
verification of laws and principles and the substance of 
theory in economic facts. 

References: See end of Chapter III. 



42 



ECONOMICS. 



CHAPTER III. 

THE SCOPE AND METHODS OF POLITICAL ECONOMY. 

Field of Political Economy. 

The study of political economy will follow wherever 
man leads in the creation of wealth. Yet there are many 
phases of social and political life which are not in them- 
selves distinctly economic, and which are entirely excluded 
from the range of economics. Many facts of the economic 
life may be traced out in effects, on the society at large, 
which would not be considered within the province of po- 
litical economy. It begins and ends with wealth. Around 
wealth cluster all the principles of political economy; 
though it is not merely the production and distribution of 
this wealth in itself, but in its relation to man, which 
yields the highest form of science. Political economy may 
occupy in part the same field as political science, history, 
or sociology. But while it looks for its data in these fields 
and draws from them its principles and laws, its boundary 
as a science is entirely distinct. 

Boundary of the Science is Subjective. 

Like all other sciences, the boundary is subjective. In 
defining the boundary of any science we must find first 
the principles and the foundation, what end is to be sought, 
and the logical processes which it follows. Thus botany, 
biology, and chemistry may be found in the same field, 
but they are entirely different sciences, with distinct sub- 
jective boundaries. The purpose of the science, its method 



ECONOMICS. 



43 



of using data, and its logical process mark the finer dis- 
tinctions from other sciences. 

Narrow Concoption of the Science. 

In dealing with political economy there are thousands 
who advocate its narrow range. They hold that it em- 
braces a few abstract principles and theories arising orig- 
inally from concrete economic life and becoming the 
foundations of a deductive science from which certain 
other laws and principles are deduced, or which applied to 
the economic life will furnish the principles for its guid- 
ance. This narrow conception of political economy will 
exclude the relation of economic life to ethical standards 
or to political usage. It would confine jDolitical economy 
to the narrow boundary of abstract thought and theory. 
Hence it would not attempt any such thing as practical 
or applied economics. 

Liberal Conception. 

Others will give to political economy a broader concep- 
tion, and take in everything that relates to man and eco- 
nomic life. Indeed, many write so freely as to mingle 
ethics and political economy all the way through their 
writings, and others confuse political economy with public 
economy, — thus involving political science and public ad- 
ministration along with the subject of political economy. 

Outline of Economics. 
It is easy to observe that the subject may be made too 
narrow by one classification, or too broad by another. A 
fair outline of economics would insist on a two-fold classi- 
fication, to include the various parts of the whole subject. 
First, according to the nature and logic of the subject, we 
have pure or abstract political economy, which embodies 



44 ECONOMICS. 

the principles of the science which have been formed in 
the process of abstraction from concrete economic life; 
and second, applied or concrete economics. 

The latter is sometimes called practical economics, be- 
cause it deals with actual economic phenomena ; although 
one part of economics cannot be said to be more practical 
than another, for the student is never without the theory 
and principles before him. Applied economics seeks to 
verify the principles of pure economics by concrete exam- 
ples; to inquire into the state of modern economic life 
either through general or special investigations, to de- 
termine the best standard of economic life and to con- 
sider the possibility of reaching the desired ends. In the 
consideration of the last phase we enter the realm of ethics 
and politics. The field of economics would not be entirely 
covered without the important branch of the history of 
economic thought. It is only by a consideration of the 
views of different economists and schools of economy that 
we really obtain a proper conception of the science. 
Going hand in hand with this branch is industrial history, 
which follows in the concrete the material prosperity of 
nations and states. This branch must not be neglected by 
the student, for it reveals to him the basis of the science 
as the history of economic thought shows how the j)rinci- 
ples of the science have been abstracted and formulated 
from the concrete economic life. 

For the purposes of study it is well to consider 
the second classification, according economic agencies 
(1) into private or social economics, and (2) into 
public or political economics. The former refers to 
all non-political activities carried on by individuals or 
by combinations of individuals. It includes nearly 



ECONOMICS. 46 

all of modern industry in its manifold departments, 
and represents the field of operation of the laws of political 
economy. It is within this department that the laws of pro- 
duction, distribution, and exchange are manifest under free 
competition. On the other hand, public economics has to 
do with all of those relations of wealth-getting and wealth- 
using in which the state exercises a peculiar agency. Car- 
ried to its fullest extent, this department of economics 
touches political science. However, in its consideration 
onh'- economic principles should be taken into account. 
"Wherever the state operates industry for profit, whether 
the gain is applied in furnishing a cheaper service to the 
people or whether it is reserved as a surplus to be applied 
to some other form of public expenditure, the state acts 
as an economic agent, and as. such performs a political 
as well as an economic function. It is possible, however, 
to apply the principles of pure economics to this as well as 
to other economic agencies, with the probable condition of 
monopoly in the place of free competition. It is not nec- 
essary that there should be any confusion in the treatment 
of public economics with politics or political science, for 
separate sciences may deal with the same data for different 
purposes and in a different way. The boundaries of 
sciences are subjective, or psychological, and are not lim- 
ited by concrete phenomena. Hence two or more scienc(;s 
may overlap one another in the field of o]3eration without 
destroying their autonomy nor in the least interfering with 
one another. Thiis, take the subject of trusts: having 
certain data given, the subject may be considered as to 
(1) economic ejects, (2) social effects, or (3) as to 
political remedies. The first will belong to economics, the 
second to sociology, and the third to political science, ac- 



46 



ECONOMICS. 



cording to the method of investigation and the purpose 
of the science. While it is well to consider economics as 
a complete and compact science, the classification of the 
different branches will lead to a better formula or plan of 
study, and will, moreover, reveal more readily the real 
purposes of the science. The scheme presented, then, is 
as follows: 

ECONOMICS. 

A. — Classification according to nature and logic of the 
science : 

(1) Pure or abstract Political Economy. 

(a) Laws, principles, and theories. 

(2) Applied economics. 

(a) Verification of laws and principles 
in concrete economic life. 

(&) Practical investigation into econom- 
ic phenomena, general or special, 
and classification and deduction 
of the same. 

(c) Consideration of ideal .standards 
and the means of approximating 
them. 

(3) History of economic thought. 

(4) Industrial history. 

(5) Methodology of the science. 
B. — Classification according to agencies : 

(1) Private or non-political economics. 

(2) Public or political economics. 

(a) Public control of industries. 
(&) Taxation and finance so far as re- 
lated to economics. 



ECONOMICS. 



47 



The Pure Science. 

Pure science treats of fact, logically stated. The 
method employed must be deductive and hypothetical, 
although it is based upon observation. Although the pure 
political economy represents the fundamental principles 
of the science and is necessary for the full understanding 
of economic phenomena, it is inadequate to the solution of 
practical problems. Although its laws may be of universal 
application in a general way, they must be applied to 
suit each joarticular case. The theory itself excludes time, 
place and circumstance, and, if it is to be applied, one or 
more of these must be considered. 

It is well, however, for the sake of convenience, to 
make two great divisions of the subject, allowing the pure 
science to stand alone as the abstract or rational part, and 
applied or concrete political economy as a second great 
division. The former has for its object the mass of social 
facts as a whole, with a view of discovering their causes 
and deducing general laws therefrom. It is sometimes 
called deductive political economy, and is well represented 
in the old school of economists, of whom Mill and Ricardo 
are excellent representatives. As it is theoretical, it must 
apply its principles and rules to the normal man, the 
typical nation, and normal conditions, if results are to 
be expected. There are certain principles which are uni- 
versal in their application in all conditions of society at 
all times, even though there are constantly changing social 
conditions. These principles admit of logical arrangement 
and logical deductions, being based upon human actions 
and human conditions from which they have been ab- 
stracted. They serve in turn as established principles for 



48 ECONOMICS. 

the deduction of other principles of economic science. 
While, primarily, political economy is based npon experi- 
ence, the real principles have been abstracted and logically 
stated therefrom. Yet as political economy is a growing 
science, the economist cannot be a mere theorizer, much 
less a dreamer. He must be a practical observer. 

The economist is frequently called a doctrinaire, or a 
scholastic dreamer. Perhaps some years ago political 
economists dwelt more upon theoretical discussion of laws 
and less upon practical work than at present. Political 
economy certainly was treated as a theory rather than as a 
science, but more recently the study has assumed the pro- 
portions of a science. Its chief study is the investigation 
of truth rather than the development of any particular 
theory. A doctrinaire is one who follows a doctrine, hence 
a strong partisan is likely to be a doctrinaire ; a true scien- 
tist cannot well be one. He must follow the truth wher- 
ever it leads him, whether it agrees with theory or not. 
It is hardly the business of the economist to follow the 
gold doctrine, the free-silver doctrine, free-trade doctrine, 
tariff doctrine, or fiat-money doctrine, or in fact any other 
doctrine, as absolute remedies of existing evils. These 
must all be left for politicians and statesmen. In the 
search for truth and the presentation of the principles of 
economic science, the economist must hold to a positive 
side of principles and rules which form the body of the 
science; nor must he depart from any of these, unless a 
shifting of society shoitld so modify them that they could 
not be accepted in their entirety. When Adam Smith 
wrote The Wealth of I^ations, his mind was centered on 
the economic conditions of the England of his time. He 



ECONOMICS. 49 

took England as the typical nation, the Englishman as the 
typical man, and conscqnently sought to lay down prin- 
ciples which were universal and that were true for the 
economic conditions of all nations. Ricardo followed, giv- 
ing concentration and body to the main principles of eco- 
nomic philosophy ; while John Stuart Mill gave even a 
greater elaboration of general principles. Adam Smith 
has been called the founder of the deductive method. 
He also has been called the originator of the historical 
school of political economy. In fact, nearh- every school 
of economic thinkers draws something from the Wealth of 
ISTations to substantiate its position. In truth, while he 
was a student of actual conditions of society, the principles 
he formulated were based upon economic fact, and his 
deductions were so general as to be applied to all conditions 
of society. While Ricardo, Cairnes, Senior, Mill and 
others elaborated the deductive side of his economy, 
Malthus and the German school of Roscher, Hildebrand 
and Knies have developed the concrete side, which has 
also led to the development of the historical school of 
political economy. While every economist must use the 
principles of the deductive science as a basis of operation, 
it is onh^ in the realm of concrete economics that we ob- 
tain ju-actical results. 

Concrete Economics. 
It is only by the application of the science to actual life 
that we verify its laws. By it both premises and conclu- 
sions are constantly tested by experience. Indeed, by gen- 
eralization of facts all these laws are obtained. In either 
case concrete economics seeks and formulates laws that 
operate over a given period of time, and given territory or 
—4 



50 ECONOMICS. 

given social state. As we enter this field of concrete or 
applied economics there may be several lines of operation. 
First, we may seek a general verification of the principles 
of pure economics by applying these to specific cases. In 
this method examples are sought for illustration of prin- 
ciples. In the second place, we may extend the study 
to historical experience; and this process becomes one 
of pure induction. It treats of ideal standards for 
given questions, and draws its conclusions for the 
support of the same from the realm of economic 
history and statistics. It considers not only the nature 
of economic society and what it ought to be, but also 
enters the field of ethics. If it passes on to the demon- 
stration of the ways and means of changing the trend of 
economic life or the enforcement of artificial law con- 
trolling economic customs, it enters the field of politics. 
From the study of political economy there have come two 
standards ; there have developed what are known as the old 
and new schools, or the deductive and inductive, or the 
scientific and historical schools. Although these divisions 
are not identical, they show the general trend of thought: 
one in its adherence to abstract principles of political 
economy; the other to the concrete or historical side of 

economic life. 

Practical Economics. 

If we consider a third phase of economic study we 
shall enter by it into practical economics, an important 
branch of applied economics. In this a particular case, 
limited in time and condition of society, is considered in 
regard to its nature, history, justness, and proposed change. 
Such, for instance, as the city ownership of waterworks in 



ECONOMICS. 51 

a given town. It is a case of statistical inquiry and of 
concrete investigation ; therefore it differs from the inves- 
tigation into pure theory. 

The underlying principles of abstract political economy 
may be brought to bear upon the case to show how far 
they apply. Indeed, it is impossible to carry on any eco- 
nomic investigation in the field of applied economics with- 
out being thoroughly versed in the principles of the 
science; although in applied economics the solution of the 
concrete problem is the objective point. This comes as 
essentially within the scope of the science of political 
economy as does the abstract theory. Dogmatists have 
tried to draw hard and fast lines between the pure eco- 
nomics and the applied, discarding either one or the other. 
Some have gone so far as to consider the principles of 
political economy to be only the customs and habits of 
people as portrayed by economic history, thus annihilating 
the body of the science. But political economy has a 
service to perform, and the economist will stop short of 
his duty if he does not point out in the concrete world the 
actual effect of economic law, ascertaining what ought to 
be, by which he advances upon pure ethics, and sufffifest to 
what extent economic usage could be modified by law. 

Problem of Political Economy. 

From the foregoing conclusions it may be stated that 

the great problem of political economy may be included in 

five leading points as outlined in Prof. Wagner's Lehr- 

bucli: 1. The description of economic phenomena; 

2. The explanation of the causes upon which they depend ; 

3. The determination of the standard by which their social 
merit may be measured ; 4. The setting up of an aim for 



62 ECONOMICS. 

economic progress; 5. Examination of the ways and 
means for attaining this end. Thus we see that applied 
economics has in itself a wide field, and it conld not well 
be ignored. The study of economic phenomena and the 
arrangement and classification of material must be carried 
on with as much zeal in economics as in the natural 
sciences. There should be a scientific method and a scien- 
tific spirit, and a desire to know the truth for the truth's 
sake. This must be either through the investigation 
of historical fact in connection with the best economic 
development, or with the statistics of present economic con- 
ditions. 

Mistakes in Terminology. 

In the study of political economy of any kind there are 
great difficulties to be encountered, and one of the greatest 
is that it is all clothed in terms common to everyday life. 
Fallacious reasonings are on this account more frequent 
in political economy than perhaps in any other science. 
The phenomena with which it deals are all every-day occur- 
rences and intermingled with the common pursuits of in- 
dividuals and their material interests. Everybody, there- 
fore, thinks he is a political economist because he sees 
something of the nature of the material upon which the 
science operates. But while we may use the terms interest, 
wealth, wages, capital, and profits in every-day sense, there 
frequently is a peculiar economic signification attached to 
each of these terms in the science. Many writers indeed 
use these terms indiscriminately. As for example, the 
use of the term " profits," which may be either necessary, 
temporary, or personal or monopoly profits; or it may 
be used as gross profits, or net profits. It is difficult to 



ECONOMICS. 



53 



determine what is meant by the unqualified use of the term 
" profits," In every instance it is necessary to discrimi- 
nate very carefully as to the specific meaning in each sense 
used before an economist can be understood. 

Ethics and Economics. 

IN'early all writers on political economy have been forced 
to dispose in one way or another of the subject of ethics. 
One group of writers have held that ethics has nothing to 
do with economics whatever ; that j)ol itical economy proper 
never questions what is right, what is just, or indeed in any 
sense the duty of man to man. It simply inquires into 
what actually occurs and what are the principles concern- 
ing the occurrence. Another school hold that ethics gives 
man his chief factor in the economic life; that his duties 
to his fellows should be considered in every economic ac- 
tion ; and so in their writings all the way through we find 
ethical ideas introduced. Another group would exclude 
ethics, relegating it to the realm of applied economics. 

It certainly can be demonstrated that the pure principles 
of political economy have nothing to do with ethics. Theo- 
ries of wages, interest and rent are not questions for 
ethical consideration, and in the discussion of these theories 
it apjDears proper that ethical considerations should be en- 
tirely excluded. However, it appears there have been 
thrust into the economic world ethical considerations. It 
is impossible to give the full eifect of the science without 
considering the ethical standard. ISTo science has per- 
formed its service to humanity until it has been applied 
to actual life; until it considers the standard and results 
of right or wrong actions. The justice of certain economic 
processes is entitled to consideration, but in order that this 



54 ECONOAIICS. 

ethical consideration shall not interfere with the standard 
of the pure science, it is well to exclude it entirely from 
the principles, and make a separate division which shall 
consider under the head of applied economics the question 
of what ought to be. 

Politics and Economics. 
The term " political economy " is somewhat misleading 
when it is really known that there is very little politics 
in it according to the modern term. There is a popular 
notion that political economy means preeminently the dis- 
cussion of the questions of tariff, free trade, and an advo- 
cacy of a national policy of one or the other of these doc- 
trines ; or, since the late discussion of the money question, 
the chief province of political economy is a determination 
of what kind of currency a nation should use. In the 
preat body of economics, politics has no position whatever. 
Treating of value and utility, of the laws of supply and 
demand, of rent and wages, questions of state activity to 
enforce all these laws may not be considered. However, 
if it is permissible in applied economics to admit the 
question of ethics and consider what ought to be the stand- 
ard of justice in economic production and distribution, it 
may be permissible to go a step farther, and point out to 
what extent the state may advance the interests of man by 
developing a more perfect economic system. Thus ethical 
politics may be considered in the development of economic 

science. 

Private and Public Economics. 

The great body of political economy is called private 
economics, because it deals with economic life independent 
of state activities. It refers to the laws and principles 



ECONOMICS. 65 

developed bv man, individually or in groups, in the wealth- 
getting or wealth-using process. It has nothing to do with 
public policy. It is sometimes called social economics as 
distinct from the policy of states. English writers and 
most of the German writers on political economy, as well as 
the Americans, have adhered especially to private econom- 
ics as distinct from public, while the French writers have 
interwoven their political economy largely into a public 
policy of administration. Public economics treats of the 
relation of state activity to the economic life. It includes 
the principles of finance and taxation, because these are 
administered by the government and have certain bearings 
upon the economic life. Wherever the government has in- 
terfered with trade, industry, commerce, labor or wealth, 
in restricting or advancing its operations, we come in con- 
tact with public economics. Hence it appears that no 
political economy is complete without a consideration of 
this phase of economic life. Indeed, public economics be- 
comes of late years more and more important. 

Sociology and Economics. 
By some, political economy is called a branch of soci- 
ology. Evidently, political economy is social science be- 
cause it deals with the relation of men in their associated 
capacity. But that sociology should be considered the ge- 
neric term, of whici: political economy is one of the sub- 
jects, is hardly permissible in the present development of 
sociology. It would be better to insist that political econ- 
omy has been differentiated from the great body of social 
sciences, just as political science has been differentiated, 
and that sociology stands alone as a compact science, one 
among a group of sister sciences of which political economy 



56 



ECONOMICS. 



is an important member. Sociology, political economy, and 
political science ma^^ operate in the same concrete field but 
still be distinct sciences, separated from each other in aims, 
processes, and conclusions. 

Efiect of Social Organization. 

The effects of social organizations in the economic life 
are very great. The organization of human society on a 
religious basis with the central idea of promoting the relig- 
ious, moral and spiritual interests of mankind, may have a 
vast influence on the development of economic life, interfer- 
ing directly with the supply and demand of economic goods, 
and indeed with the actual practices in the economic world. 
So, too, every direct social organization that may be estab- 
lished may have a vast influence upon economic conditions. 
x\nd especially is this true of the great organization called 
the state. Organized especially for political purposes 
alone, for the protection of property and the advancement 
of the general interests of the people at large, it has a vast 
influence over economic production and distribution, and 
also in modern times has had much to do with the regula- 
tion of distribution. And while it has not entered largely 
into the process of the economic life or sought to interfere 
with it to any great extent, certain laws and restrictions 
have been established which tend to modify the principles 
of political economy. At least, if it has not interfered 
with competition directly it has arranged a state by which 
it proposes to determine the plane of competition, and sets 
its limitations. This we can observe in the establishment 
of maximum prices for gas and water, maximum freights 
and fares, the regulation of the interests of labor or cor- 



ECONOMICS. « 

porations, and other specific points which show to what 
extent the state has attempted to regulate industry. 
Objects Sought in Political Economy. 
The chief object sought, then, in political economy as a 
study, is to determine the principles and laws which con- 
trol the economic life, to verify these principles by concrete 
examples, and to carry the study into the investigation of 
the modern economic life. It should not stop here, but 
investigate most thoroughly all economic problems, whether 
theoretical or practical, reaching a final solution in each 
case. As to the general effects of the study of the science, 
it ought to create intelligent citizens and statesmen, 
and prepare all for the position of cooperators in the 
economic and political life. As a means of discipline there 
can possibly be no better subject anywhere in the whole 
university curriculum. It requires scientific thought, close 
investigation, careful, philosophical reasoning, and excess- 
ive power of determination. Possibly there may be to-day 
somewhat of an indefiniteness to the science, owing to the 
fact of conflicting opinions respecting its development. 
But all human life is a science of probabilities, and a study 
of these questions prepares one more especially for specifio 
living in cooperative society than does that of a study of 
natural science, which applies less directlj'^ to the social 

wants of man. 

Methods of Study. 

There are two great methods of the study of political 
economy. One is to begin with the concrete examples, and 
approach by degrees the nature of economic society, observ- 
ing the principles as one passes along. That is, to approach 
it from the inductive standpoint, gathering facts and male- 



68 ECONOMICS. 

ing generalizations from these facts, applying the laws 
which have already been demonstrated of specific things. 
Another way is to take up the study of the principles of 
political economy as laid down in the works of the older 
economists, and master them ; and then, to master the va- 
rious theories that have been advanced from time to time, 
and having done this to turn the attention to the application 
of these principles to actual life. To those well ma- 
tured by years of study there can be no question that 
the study of the theoretical and abstract principles of 
political economy should be first, followed by a study 
of the higher theory and with it the history of economics, 
and after that a careful investigation of the problems 
of modern economic life. It would be well to study the 
principles of taxation as related to economic theory along 
with the principles of political economy, and to leave 
public economics in the real sense to the last, in con- 
nection with the study of concrete problems. 

References: Cossa, Luigi, Introduction to the Study of Politi- 
cal Economy; Keynes, J. N., Scope and Method of Political 
Economy; Nicholson, J. S., Political Economy as Branch of 
Education; Patten, S. N., The Educational Value of Political 
Economy ; Jevons, W. Stanley, The Theory of Political Economy ; 
Oairnes, J. E., The Character and Logical Method of Political 
Economy; Marshall, A., The Present Position of Economics; 
Laughlin, J. Lawrence, The Study of Political Economy ; Fetter, F. O., 
Principles of Economics. 



BOOK II. 



PRODUCTION, DISTRIBUTION, AND CONSUMPTION. 



PART I. 

FACTORS AND PROCESSES OF PRODUCTION. 



CHAPTEK I. 

THE NATURE OF PRODUCTION. 

Unity of the Economic Process. 

Production is the greatest fundamental economic pro- 
cess, although in a general way there is unity of all eco- 
nomic processes. The general divisions of production, 
exchange, distribution and consumption are merely parts 
of one great life. The divisions have been made chiefly 
for the purpose of analysis and instruction. Actually, 
there are no distinct and unchangeable boundaries between 
these great divisions. The permanence with which they 
have been held to by economic writers has frequently 
led young students to wrong impressions of the true nature 
of underlying processes. A man may be a producer, an 
exchanger, a transporter, a consumer of goods, while at the 
same time he is a factor in economic distribution. ^Vhilc 
this unity of economic process is evinced on all sides, it is 
nevertheless true that persons specialize along certain lines 
of work. There are those who are manufacturers of 
goods; others who are producers of raw material; still 
others who devote their sole time to the transportation 

(61) 



62 ECONOMICS. 

of goods; and others indeed who are mere exchangers; 
while each and every one is a representative in the eco- 
nomic process of distribution. It is convenient to recognize 
the process of the creation of wealth in any form what- 
ever as production, and to characterize every other process 
of economic life by some special name, as exchange, dis- 
tribution, etc. 

Character of Production. 

As before stated, production consists in the creation of 
utilities, or indeed in the creation of economic goods or 
wealth. It consists in the transforming of raw materials 
into forms of utility and beauty for the satisfaction of 
hutnan wants. Primarily it is the application of labor 
to what is termed nature, to make it yield a service to 
mankind. By nature is meant all those physicial forces 
which can be used for the service of man and all those 
climatic and physical conditions which modify his en- 
vironment. First of all we have land, which yields 
through its fertility vegetable foods to support the life 
of man and beast. It also yields mineral products from 
underneath the soil. In this connection, too, we have~^ 
water, which yields the service of sustaining life, en- 
ables us to transport goods from one place to another, 
and yields a force with which to propel machines. We 
have another form of nature, which is also used as a pro- 
pelling force, primarily, — the muscular strength of ani- , 
mals which have been domesticated for man's service. And T 
finally, through man's inventive genius we have the use of 
steam and electricity, two of the greatest forces of nature. 

We have also inorganic substances, the components of 
the earth's crust, which are included in what we call raw 



ECONOMICS. 63 

material. Building-stones, clav, chalk, salt, coal and pe- 
troleum and other sources of wealth, when once converted 
into useful products, make up a large proportion of the 
wealth of the community. 

We have also organic substances, which are found in 
the forest already produced by nature in plants and veg- 
etables of every variety, which are made available by the 
process of labor. The whole work of production consists 
only of changing the place or the form of material. Man 
has always brought to his aid through his inventive genius, 
tools and machines to supplement his lack of muscular 
force. Beginning with muscular force, he has domesticated 
the animals and added their service to his own limited 
ability. He has harnessed the winds and the water, and 
thus increased the active forces. He has utilized the 
expansive power of steam and other vapors and gases; 
he has utilized the principles of heat and electricity, and 
thus added to his own great productive power. How far 
he will continue in the increase of his power of produc- 
tion, yet remains to be seen. Whether or not atmosphere, 
heat, and ether may not yet be added to electricity and 
steam in different forms, and these, accompanied with 
man's inventive genius in the creation of machines and 
tools, will add to the power of production until again it 
shall be increased one hundred fold, remains to be seen. 

Creation of Wealth. 

In an economic sense, wealth includes all those useful 
articles which supply the wants of man. It matters not 
whether they may be always beneficial in this use, or not. 
If they satisfy some known wants, though in the long run 
their effect may be deleterious, the articles assume the 



64 ECONOMICS. 

form of economic goods, and are called wealth. A dis- 
crimination should be made at once between the common 
signification of the term wealth, meaning the relative 
amount of property which a man owns, and the economic 
use of the term wealth. In the latter sense it means any 
form of economic goods or utilities, such as tools, articles 
of apparel, buildings, food, ornaments, or anything which 
satisfies the wants of man. The man who owns the shovel 
with which he labors is wealthy in the economic sense, to 
the amount of the shovel, just as the man who owns great 
machines and buildings and tools and railroads is wealthy 
to that extent. 

The sum total of the wealth of a community is found 
by an estimate of the net private wealth of individuals 
plus the net public wealth of the nation. Sometimes 
those articles which are classified as personal or private 
wealth may be nothing more than an evidence of an in- 
debtedness which must be accounted for in the inventory 
of the wealth of each and every person. Thus, a mort- 
gage may be considered as the private wealth of an in- 
dividual, but in the estimation of the private wealth of 
another individual, upon whose property the mortgage is 
made, it must be considered as an evidence of indebtedness. 
Thus the person who holds a government bond may be 
considered wealthy to that extent, but in the estimate of 
national wealth the same government bond must be en- 
tered as evidence of indebtedness. 

The creation of wealth has increased rapidly within 
recent years, for its process is necessarily cumulative. 
Each year adds new processes of labor, new kinds of 
machinery, and new methods of development. Each 



ECONOMICS. 66 

year adds a large amount of capital engaged in produc- 
tive processes, which adds momentum to wealth-j)roducing 
and increases in geometrical ratio the power of wealth. 

Who Are Producers P 

It is a popular opinion that those persons who are 
transforming raw materials into the finished product and 
those who are engaged in the production of agricultural 
and mineral products through the aid of nature are all 
producers and all others non-producers. According to 
this notion the capitalist, the merchant, the banker, the 
lawyer, the minister, are all classed in the great group 
of non-producers. The Physiocrats estimated the produc- 
tivity of toil by the proportion of useful raw materials 
secured, as in farming, stock-raising, mining, lumbering, 
and so forth, and they stigmatized all other occupations 
as barren because they were sustained by the surplus prod- 
ucts of the land. Prior to them the mercantilists con- 
sidered all industry as productive only in proportion as 
it tended to enlarge the nation's stock of money. Adam 
Smith and John Stuart Mill called all exertion, however 
useful it might be, which does not take the form of creat- 
ing some useful material object or fixing and realizing it- 
self in such object, unproductive . It has been the tendency 
of English economists to follow Smith and Mill, while 
the French school of philosophers have held to the doc- 
trine that all labor is productive that imparts economic 
modifications to material nature, by man. Some of the Ger- 
man writers go even farther than this, and define every 
form of labor as productive which society is willing to 
pay for; as Roscher states it, "Every service which is 

rationally sought, and duly paid for, is productive." 
—5 



66 ECONOMICS. 

All members of society who are performing a service 
which has exchangeable value, or creating exchangeable 
goods, may be called producers. It is quite the popular 
error these days to suppose that farmers, for instance, are 
more a producing class than merchants, bankers, manu- 
facturers, or transporters of goods. The farmer, it is true, 
produces food for the merchant, but the merchant ex- 
changes clothes for the goods. If it were not for the mer- 
chant the farmer would be obliged to leave his work and ob- 
tain his clothes from the clothier personally. Or if it were 
not for the manufacturer he would be obliged to do as he 
did in the olden time, allow his wife to manufacture it 
for him. Also, the farmer would manufacture his own 
tools, and it would occupy much time which could be used 
more advantageously in the tilling of the soil. It is sim- 
ply a question of the division of labor, in which the farmer 
says, " I will raise the wheat and exchange it for cloth- 
ing, implements, furniture, flour; and all the food that I 
need, which does not grow upon my land." Possibly the 
farmer has it within his power, if he chooses, to become 
independent to a greater extent than any other individual, 
for in a meager way he is the source of all production. 
l^evertheless, without turning civilization back upon itself 
he must remain dependent upon others, who cooperate 
with him in the process of production. 

Nature of Wealth. 

Wealth consists of the utilities in the form of economic 
goods which are formed by shaping, combining or placing 
the various elements of nature. This wealth has some- 
times been classified as material and immaterial. Ac- 
cording to this classification, material wealth includes 



ECONOMICS. 67 

tangible goods that may be exchanged in the market; 
immaterial wealth refers to forces and conditions, such 
as superior skill, talent, or endowment, good-will in 
business, and certain forms of credit. It appears 
that it is better to discriminate very carefully be- 
tween wealth and the individual; that is, between wealth 
and the conditions of wealth. If wealth consists in the 
well-being of man in his relation to material goods, it is 
necessary in political economy to understand that wealth 
is "objective to the user, material, useful and exchange- 
lable." These are the four essential characteristics of 
wealth. Wealth, too, is material, because those things 
which are immaterial cannot be well measured, and wealth 
can be. Only those things which are said to be useful and 
exchangeable can be said to be wealth, and by useful we 
mean things that are used, not necessarily things that are 
beneficial. It is sometimes said that people sell the good- 
will of a business, and therefore that the good-will of a 
business should be considered immaterial wealth. A care- 
ful analysis shows that you sell a business at a higher 
premium on account of its locality, and these excessive 
bonuses paid are really in the nature of rent paid for a 
permanent monopoly. It is also asserted that when Patti 
gives one of her magnificent renditions, her song is ex- 
changeable wealth. It would he better to regard Patti 
as an individual endowed by nature and developed by 
training to such an extent that she yields a superior ser- 
vice to mankind, which is regularly sought and duly paid 
for as a service, and not as wealth. The extra sum paid 
for this superior service is in the nature of rent of native 
and acquired talent and qualities. 



68 ECONOMICS. 

Various Methods of Creating Wealth. 

Material wealth is generally j)roduced (1) bj spon- 
taneous products of nature, such as forests, mineral 
springs, and favorable localities; (2) by digging products 
from the mines ; ( 3 ) by the growth of vegetable and ani- 
mal products obtained by working in harmony with na- 
ture's forces; (4) by transporting things from place to 
place; (5) by changing the forms of things; and finally, 
(6) by exchanging them between different owners. Outside 
of these specific processes of obtaining material wealth, 
social organization and social improvement are conditions 
which enhance all c these necessary forms. 

It is evident that the process of coloring by dye-stuffs, 
or that of soap-making, may be good illustrations of the 
chemical production of wealth. Everything pertaining 
to the making of clothes is an illustration of the mechan- 
ical processes of production. It is not difficult to see why 
the transportation of goods from place to place increases 
the value of wealth. As an example of this, Mr, Roscher 
refers to the ice trade between Boston and the West 
Indies. For example, it costs $2.25 to pack ice in the 
ship at Boston, but when brought to its destination in the 
West Indies it sells for $65 a ton simply because its want- 
satisfying power in the West Indies is much greater than 
its want-satisfying power at Boston, where its supply is 
unlimited. There is then no difficulty in understanding 
how it is that the exchange of goods increases wealth. 
Suppose a collector owns a good farm horse and a farmer 
a good carriage horse. The farm horse, not being a good 
roadster, is of little value to the collector, while the car- 
riage horse is of little service at the plow and of little 



ECONOMICS. 69 

value to the farmer in any other way. By an even ex- 
change of horses each would be benefited by the opera- 
tion. This disproves the old theory that if two men trade 
horses one at least must be beaten by the operation. This 
principle has been further illustrated by the example of 
three persons, each tied to a stake, without communica- 
tion: one having clothing and no food or fire, another 
having only food without clothing or fire, the third hav- 
ing fire without clothing or food. As it is, each one will 
perish for the lack of the surplus goods which the others 
have. Could they get together and exchange their surplus 
products, all might live. This principle is vital in set- 
tling the questions of international exchange, trade, and 

tariffs. 

Different Ways of Creating Value. 

The amount of wealth an article contains is termed 
its value, which represents the power an article has to 
exchange for other articles. There are various ways of 
creating this value, although it arises largely from the 
desirability of an article, and can always be traced to 
its subjective condition. The value of an article may be 
enhanced frequently on account of time. Thus, to keep 
apples from the autumn into the winter will increase 
their value, just as keeping ice from winter to summer 
will enhance its value. Also, the transporting of com- 
modities from one place to another will increase their 
value. Thus, corn which is of little value in Kansas, 
may be of greater value in Chicago, still greater in N"ew 
York, and greater in England, simply because of transpor- 
tation. But the greatest method of developing value is by 
changing the form of articles. The timber of the forest 



70 



ECONOMIOS. 



may be of little value until transformed into wagons or 
furniture, when its value may be increased one hundred 
fold. Cotton in its raw state has a certain value, but when 
changed into a fine garment through various processes its 
value is greatly enhanced. The best illustrations of the 
various kinds of value may be seen in the transformation 
of iron ore into various articles. Thus, the ore at the mouth 
of the mine is possessed of a certain value, but when it 
is transported to the smelter its value increases because 
of the change of place. When passed through the smelter 
it is changed into pig-iron, and its value is greater than 
before. If the pig-iron is transported to steel works its 
value is increased again, and increased still again when 
transformed into steel. If the same steel is developed 
into a sewing-machine, a bicycle, or a watch spring, its 
value is enhanced very many times. The value of manu- 
factured articles may be greatly increased by storage 
until the demand for them is increased. 

We shall find, then, that in the production of wealth 
to change the form or place of an article may increase its 
value, and that the value is represented always in the 
power of exchange. It is the relative term always ac- 
companying the utility of an article which represents its 
want-satisfying power. But this takes us back again to 
the proposition that all persons engaged in these various 
processes are producers, and all those who are aiding 
directly or indirectly the persons engaged in these specific 
processes may also be classified as producers. 

Various Processes of Production. 

If we inquire, however, into the essential elements of 
production, and try to estimate what factors are most 



ECONOMICS. 71 

largely engaged in the process, we shall find that land, 
or nature, labor, capital and social organization are the 
great factors of production. 'Not that nature in itself 
is a producer of wealth without the process of labor or 
human exertion, but it occupies such an essential position 
in the process of production that it is considered a factor. 
These are all working in combination in the creation of 
wealth. While capital at first was not a primary factor, 
it has become essential to modern economic processes. 

Essential Factors of Production. 
The two essential factors of production are land (or 
nature) and labor. Without these there can be no arti- 
ficial production of wealth. By land we mean not only 
the earth in its fertility and wealth of vegetable and 
animal life, but the water-power, and indeed all the per- 
manent forces of nature which may be used and turned to 
man's service. It is only by the application of labor to 
these that wealth or economic goods are produced. In the 
beginning labor takes the initiative by transforming 
the products of nature into useful articles, such as 
bows and arrows and implements, or into boats, canoes, 
and household utensils. Again, it creates clothing, and 
houses, — all from the raw products of nature. These pro- 
ductions are called wealth, in the creation of which labor 
has been the constant factor from the beginning. 

Conditions of Wealth-Producing. 

If man through labor has developed certain wealth, 
and this again is turned to aid in the production of 
other wealth or economic goods, such wealth set apart to 
be used in the production of economic goods is called 
capital. In the modern economic life there is no produc- 



72 ECONOMICS. 

tion of any great extent possible without capital. Though 
labor logically preceded, capital usually takes the initia- 
tive in production. The process is as follows : first, labor 
produced certain portions of wealth ; then this wealth was 
used along with labor to create other wealth. As wealth 
increased, capital became mor© prominent, and it em- 
ployed more laborers in the obtaining of raw material and 
in the manufacture of useful articles from this raw ma- 
terial. In some enterprises we find a large amount of 
capital and a small amount of labor necessary for produc- 
tion, while in others the process is the reverse, and we 
find a large amount of labor to a small amount of capital. 
But in every instance, before production is entered upon 
capital takes the initiative. It constructs the buildings, 
it furnishes the machinery and raw material, and gives 
labor an opportunity to earn its own wages. Thus labor 
is limited in its efforts by the amount of capital in use. 
The other non-essential condition of wealth-producing 
is social organization. It is sometimes said that the state 
is a partner with the individual in the process of produc- 
tion. This is rather a strong and fanciful expression, al- 
though it must be conceded that without social organiza- 
tion modern business enterprises would be futile. The 
organization of society protects property and guarantees 
the rights of each individual to the products of wealth. 
More than this, when society at large deepens a harbor 
or widens a river, builds a canal or railroad, or furnishes 
means for the better development of agriculture, manufac- 
tures, exchange, trade, or commerce in any way, it is 
performing a great service in the advancement of produc- 
tion. Therefore modern productive enterprises are not 



ECONOMICS. 



73 



only not possible without social organization, but the effect 
of social organization is to advance them at a rapid rate. 

Means of Increasing Production. 

One of the best methods of increasing production is 
through superior business management, and this has de- 
veloped a distinct class of people, and indeed a distinct 
vocation, in production. It might be well to suggest the 
ordinary fifth factor in production as managing ability, 
for indeed without this, modern business enterprises could 
not be carried on. The entrepreneur or business manager 
furnishes the brain-power that keeps industry intact. He 
assumes the risk and responsibility of business, under- 
takes business enterprises, paying for capital, labor and 
land as he has need. But while he has the responsibility 
of loss he has the right of gain. Outside of a sound and 
industrious body of laborers, other things being equal, no 
other factor is of greater importance than the managing 
ability of the business men who undertake the great en- 
terprises of industrial life. 

There are other means of enhancing production, by 
having a better quality of labor, and better relations be- 
tween those furnishing the capital, the labor, or land, 
and the managing ability. Harmonious activity of all 
factors enhances production. Also, it may be stated that 
certain things which have arisen out of the necessity of 
economic progress from time to time represent some of 
the most wholesome conditions of production. Among 
these are the divisions of labor which enable men to pro- 
duce more in the same time with less energy: the intro- 
duction of so-called labor-saving machinery, which com- 
bines with man's service as the result of his inventive 



74 ECONOMICS. 

genius; and the credit system, which enables the rapid 
exchange of goods, rapid transportation facilities, the 
fertile soil and excellent climatic influences, all of which 
tend to modify and intensify the processes of production. 

References: Walker, Political Economy; Gunton, "Wealth and 
Progress ; Roscher, Political Economy ; Marshall, Economics of 
Industry. 



ECONOMICS. 76 



CHAPTEE II. 

LAND AS A FACTOR IN PRODTJCTION. 

Land or Nature the First Consideration. 
Man derives directly or indirectly all his sustenance 
from the soil and from the elements of nature. From 
the soil he receives vegetable and animal products. From 
the water he receives power to turn machinery and means 
of transportation. The winds furnish him means of pro- 
pelling machinery and mills, and carrying on commerce. 
The forests yield him timber; the mines yield him coal, 
salt, iron, precious metals, and many other products. The 
sunshine pours a flood of light and a volume of heat upon 
the earth, and quickens everything with life. It is from 
nature that man receives the conditions that allow life and 
the means which perpetuate it. It is through labor, in the 
mastery of these forms, forces and elements of nature, that 
man supports life and advances his material welfare. 

Bounties of Nature. 
Nature is everywhere bountiful so long as labor forces 
her to yield her treasures. Economic writers have spoken 
of the niggardliness of nature, and how through excessive 
toil only could man receive his support. They have pic- 
tured all of the difficulties of economic life as appearing 
directly on account of the niggardliness of nature in with- 
holding her bounties from man. Other writers have tried 
to show that nature is bountiful, and that all wealth 
comes from it. 



76 ECONOMICS. 

The boimtifulness of nature varies in many ways on 
account of different climate and soil. In one territory 
the soil is fertile, and with a small amount of cultivation 
responds readily to the labor of man; in another place 
the soil is poor, and with his utmost attention it yields 
but a meager crop. In the tropical climates food grows 
already prepared, while in the colder climates the soil 
must be thoroughly tilled to yield a crop. Within the 
tropics very little clothing or shelter i& needed for pro- 
tection, in the temperate climate substantial houses and 
abundant clothing are necessary, while in the extreme 
cold regions man's whole time is occupied in obtain- 
ing sufficient animal food to keep him alive and clothing 
to preserve him from the rigors of the climate. Standing- 
alone, nature appears hard, cruel and niggardly, but with 
labor applied she is made to yield a rich store of treasure. 
By labor, food is accumulated in abundance, clothing 
comes without stint, and houses and palaces arise for the 
protection of man. By labor, the refinements of art and 
education are made possible. It is true, that at times 
nature appears fickle, for drought may spoil the crops, 
storms may devastate them, buildings may be destroyed by. 
the ravages of fire and wind, and men may perish through 
starvation or the fatal pestilence. Yet it may be stated 
that upon the whole, nature yields her bounties to man in 
proportion to well-directed labor. 

Offices of Land. 

Land is essential, directly or indirectly, to all economic 

processes. Primarily, it is the great factor in production. 

It gives us standing-room, without which nothing can be 

accomplished ; for location, or position, is essential to life. 



ECONOMICS. 



77 



In a scientific way the principle of location has a vast 
deal to do witli economic life and economic theory. 
Again, by fertility it yields vegetable products for man 
and beast for the purpose of sustaining life and for use 
in the arts and industries, and finally from underneath the 
surface it yields the rich mineral products, salt, iron, tin, 
copper and zinc, so much used in the economic arts, and 
gold and silver, desired for their services as money and 
in the ornamental arts. With these three uses of land 
man spends the greater part of his life in making a com- 
bination of forces or materials in the creation of forms 

of wealth. 

Civilization and the Land Question. 

In the economy of human existence the influence of a 
fertile soil cannot be overestimated. The ancient civiliza- 
tion of Babylon, the arts and industries of Egypt, the 
philosophy and learning of Greece, depended upon a fertile 
soil. So great has been the influence of the land question 
among the nations of the world that if one were to writs 
the history of land tenure he would have formed, in gen- 
eral, a correct estimate of the primary cause of the rise 
and development of national life. In our own nation the 
effect of a large fertile agricultural area is frequently 
overlooked by economic philosophers. Our broad valleys 
and our fertile soil brought immigrants from the Old 
World to seek homes in the new land; our abundant min- 
eral resources found in the heart of the mountains brought 
miners from the Old World to dig and delve for treasures 
here and develop a great population. It is the immense 
yield of these agricultural and mineral products that sup- 
plies the millions M'ho run the factories, tlie looms, and 
the shops of our own country, and furnishes the surplus to 



78 ECONOMICS. 

feed the nations of the Old World, for which we receive 
an ample return in a variety of imported products. 

Population and Land. 

With the growth of population the supply of labor is 
constantly increased, and it is limited by the amount of 
available food-supply or subsistence. Fearing that the 
growth of population might gradually outrun the means 
of subsistence, an English econoraist named Malthus ad- 
vanced a theory of population as follows: he held that 
population tended to increase in a geometrical progres- 
sion, while the food-supply under most favorable circum- 
stances could not be made to increase more rapidly than 
in arithmetical progression. Hence if there was no check 
to the natural increase of population there would soon be 
more people than the land could support, and thousands 
would die of starvation. But there are sufficient checks in 
the growth of population to allay all fears on the subject. 
The first group are called the positive checks, by which 
population is kept down by means of war, pestilence, 
plagues, intemperance, vice, and crime. Thousands thus 
perish from the face of the earth every year. The pre- 
ventive checks are those of character and prudence, by 
means of which, as population becomes denser, marriages 
are postponed and the number of births lessened. Also, 
through self-control families become smaller each succeed- 
ing year, and a check occurs on increasing density of popu- 
lation. The result is, that population practically does not 
increase in a geometrical ratio. Again, through modern 
invention and skill land is made to yield a larger return 
for the support of life. Thus, by intensive agriculture an 
acre of land will yield a larger support of life than ever 



ECONOMICS. 79 

before. Bj the modern art of cooking and preparing food 
a quantity of food has nearly doubled its power to sup- 
port life. So that there has always been land enough, and 
so far as we can see for hundreds of years to come there 
will be sufEcient land to support the population. Some 
of the instances of the rapid increase of population would 
seem, however, to be a subject for thoughtfulness, at 
least. If population should increase in the United States 
in the future as it has done in the past, it is only a matter 
of time when there will not be sufficient standing-room 
for the people. If our population continues to double 
every twenty-five years as it has done in the past, in 1925 
we shall have 150,000,000 people; in 1950, 300,000,000; 
in the year 2000 we should have 1,200,000,000 people; 
and it would not be long before we should have in the 
United States more than the entire population of the 
globfe at the present time. But the checks have already 
set in, both to immigration and to birth, and such a 
calamity is not likely to occur. Mr. Marshall points out 
that if there are only two people on the face of the earth, 
and that if population doubles once in fifty years, at the 
expiration of 3000 years the whole surface of the earth, 
land and sea would be covered with people 300 deep. The 
significance of these subjects is seen when the relation of 
land to population is considered, for the development of 
wealth is changed to a great extent by a rapid increase. 
Laws of Income from Agriculture. 
Industries are divided for convenience into those of 
increasing returns, decreasing returns, and equal returns. 
By this is meant in the first instance, that if a certain 
amount of labor and capital yields a certain income, double 



80 



ECONOMICS. 



the amount of capital will yield more than double the in- 
come; and in the second case, that if a certain amount 
of labor and capital yields a certain income, double the 
amount of capital and labor will yield less than double 
the income. In the third case, it is assumed that income 
will be increased in proportion to the amount of increase 
of labor and capital. Agriculture is generally considered 
an industry of decreasing returns. But it is necessary 
to consider specifically what is meant by this assertion. 
Usually when this statement is made, it is understood to 
apply to a limited portion of land. Thus, if a given farm 
is taken of a thousand acres, a certain number of laborers 
with sufiicient capital applied to work the farm will give 
a certain income. If double the number of laborers crowd 
into this same area, with a proportional increase of cap- 
ital, and the limit of production is not reached, they may 
greatly increase the product. Hence, increased amounts 
of labor and capital may be continually applied to this 
tract of land with a gradual increase in the returns or 
product; but this will be entirely disproportionate to the 
labor and capital expended. It may be more clearly illus- 
trated in this way: To plow the land once it will yield 
a certain crop; to plow it a second time will certainly 
increase the crop, but will not double the product. To 
plow it a third time will probably increase the product 
slightly, so that there is not proportionate return to the 
amount of capital and labor invested. Yet when we con- 
sider agriculture as a whole, it will be found, if a long 
period be considered, that it is an industry of increasing 
returns. The invention of new machinery, new methods 
and appliances, and the increased utility of food, as above 



'' ECONOMICS. 81 

stated, yield a larger return in proportion to the number 
of persons engaged each succeeding year. In the consid- 
eration of this principle, all accidents of drought and years 
of agricultural depression must be excluded as abnormal. 
In the case of manufactures, however, which are gen- 
erally classified as industries of proportionate returns, it 
■^vill be found that they also increase their returns from 
year to year in proportion to the number of persons en- 
gaged, more rapidly than does agriculture. However, if 
:taken in a limited sense in a particular field, owing to 
competition, it will be found that manufactures decrease 
in returns the same as agriculture in a limited field. 
Where special monopolies exist, such as railroads, tele- 
graph lines, and water-power, the industries are usually 
those of increasing returns, as they yield an income in a 
proportion greater than the increased application of capi- 
tal and labor. 

Limited Returns. 

In agriculture, when a given territory is considered, 

the law should be given as one of limited returns. That 

is, in the cultivation of a given tract of land a point is 

soon reached at which no additional application of labor 

or capital will cause the soil to yield any increased prod- 

U.ci In many of the industries outside of agriculture 

'the same principle of limited returns is to be observed, 

in a lesser degree. The law of competition which reduces 

the market price to the cost of production, limits what 

may be done and what may not be done to develop an 

income. 

Extension of Territory. 

The opening up of new lands to modern civilization 

presents the relation of land to income in its clearest light. 



82 ECONOMICS. 

When Columbus first landed in America a few thousand 
Indians were roaming over a vast territory. They felt 
that there was not sufficient room for them to obtain a 
living, so they fought with each other for territory. To- 
day 75,000,000 of people occupy the same territory within 
the present boundary of the United States, and still, with 
the exception of a few congested districts, there is abun- 
dance of room. When the barbarians swept down over 
Europe and invaded the Roman empire, it was to find a 
larger area of land. Although few in number, their mode 
of living made the country insufiicient for their needs, 
and made them discontented with their lot. Thus, rather 
than seek different methods of intensive agriculture or 
larger use of the land, they simply sought new lands, 
boping to retain their old mode of life. Had they changed 
their civilization by introducing intensive agriculture, the 
utility of land would have been so greatly increased as to 
have supported a larger population without the necessity 

of migration. 

Land Area. 

Within recent years large amounts of fertile land have 
been brought into use in the United States, which has 
yielded a large increase in the returns of the quantity of 
the products. As the demand for every agricultural prod- 
uct shows a diminishing scale of utility, and as the value 
of the whole product is determined by the marginal utility 
represented by the last unsatisfied want, it appears that 
if the scale of demand remains constant there will be a 
diminished value of the total product; and this means 
that a point will be inevitably reached where receipts 
will fall below costs, even though costs themselves are 
also diminishing. We have had ample illustration of this 



ECONOMICS. 63 

from "Western farming in the years from 1889-1897. 
For the cost of agriculture has been decreasing all the 
timCj while the value of the product has decreased more 
rapidly than the cost; hence the price of a commodity in 
the market has frequently been reduced below the cost of 
production. Thus a relatively decreasing number of agri- 
culturists have provided food for themselves, for the 
whole nation at large, as well as for foreign markets. If 
we refer to quantity, it appears that agriculture taken as 
a whole, considered in the light of modern industrial 
methods, through a period of a century, is yielding more 
to-day in proportion to the capital expended upon it than 
ever before. It is estimated that in England during the 
last six hundred years the product per acre of staple crops 
has increased ten fold. But this, strictly speaking, must 
refer to the quantity of the product rather than to its 

value. 

Transportation and Ag^riculture. 

One of the greatest effects to be considered in relation 
to the productivity of the soil in the United States is that 
of transportation. Cheap transportation has a tendency 
to enlarge the agricultural areas and bring distant fertile 
lands into the market. For this reason the people have 
abandoned the farms of the East and have taken up lands 
in the fertile valleys of the far West, distant from the 
markets; yet the fertility of the soil is so great that the 
yield is sufficient to pay the transportation to market and 
leave an income greater than that of the inferior lands of 
the East, situated close to the markets. Indeed, the in- 
fluence of the fertile lands of the Mississippi valley has 
caused the abandonment not only of the poorer lands of 



84 ECONOMICS. 

'New England, but even those of Scotland and England 
and other regions of the Old World, which have been for- 
saken for the fertile lands of the New World. Everywhere 
we shall observe the shifting of the population, rushing 
toward new and fertile lands, or receding as they are 
deceived by the process. This change has a vast deal to do 
with the doctrine of rent. 

Policy of the United States. 

i^Tations have had different policies for the disposal of 
agricultural lands. The United States by its laws of 1787 
adopted a policy which had hitherto been unknown in the 
practices of nations in dealing with their public domain. 
This policy made it possible for everyone who desired, to 
obtain a hundred and sixty acres of land at a minimura 
price. This was deemed the wisest and best disposition 
of the land; although it did not always work well in 
practice, for the intention of the law has frequently been 
thwarted by individuals, who, by fair means or foul, have 
grasped large tracts of land, increasing their holdings iu 
some instances to territories equal to principalities. 
However, in this connection, it may be stated that from 
1870 to 1880 the average size of farms gradually dimin- 
ished, and from 1880 to 1890 there was only a slight in- 
crease in the average.* On the one hand, large farms were 
being divided into smaller tracts ; and on the other, small 
holdings were absorbed by the larger. Thus, while a large 
number of vast holdings have been created, outside of these 
the average size of the farm is diminishing. As to the 
advantages of large or small holdings, Mr. Walker asserts 
that variety of farms is best for the benefit of agriculture. 
He holds that it is a good plan to have some great farms 

* The average size of farms haa continued to diminish to the present time, 1906. 



ECONOMICS. 86 

upon which the most improved machinery shall be used 
and the most modern scientific processes of agriculture 
practiced, in order to furnish a stimulus to improved meth- 
ods. He further asserts that the medium-sized holdings, 
which give character to our great farming communities 
and enable men of moderate means to engage in the agricul- 
tural business, are beneficial to a great republic in which 
the people are endowed with the right of self-government. 
He further demonstrates that small holdings should be 
available, so that those who desire to quit the ranks of the 
wage-earning class may own a small parcel of land, and 
thus have their owm homes and carry on their own business 
independently. This variety of landholding corresponds 
to the variety of life which is necessary to the stability 
and prosperity of a government by the people. 

Monopoly in Land. 
Many fear that the absorption of small holdings into 
great baronial estates will continue until a monopoly of 
lands shall obtain, and landlordism shall prevail in the 
United States as in the Old World. In England and 
Scotland the land to-day is owned by a very few people, 
owing, in part, to the laws of primogeniture and entail. 
France, on the contrary, through the influence of an an- 
cient law, insists that the estates must be divided among 
the heirs, and the practice of very small holdings has ob- 
tained there. According to the census of 1890, sixty-five 
per cent, of all the farms in the United States were owned 
by the occupants.* This would show that landlordism or 
the rental system is gradually increasing in the United 
States. However, the farms are still small and the tend- 
ency to subdivision is great. What the future will bring 

♦ Tenant farming has increased eince l&OO, 



86 ECONOMICS. 

fortli is difficult to see. Repeated periods of agricultural 
depression maj lead to the union of agricultural interests 
and tlie management of farming on a large scale, after the 
plan of a great department store or a modern " trust." 
When a person obtains a tract of land which is peculiarly 
desirable, to a certain extent he obtains a monopoly over 
that particular piece of property. But so long as there are 
other tracts more or less desirable, this monopoly can 
never be perfect; and so long as he must compete in the 
market for the sale of agricultural products, it is impossi- 
ble for him to fix a monopoly price on his goods. Consid- 
ered as a whole, then, land is not a monopoly, unless it 
could all be owned and managed by a given individual 
or combination of individuals, l^evertheless, owing to 
the fact of the difference in fertility of soil and desira- 
bility of location, a monopoly of land arises in the form of 
rent, independent, to a certain extent, of the fact that the 
individual producer cannot fix a monopoly price and 
therefore obtain monopoly profits from his agricultural 
produce. 

Agricultural Area in the United States. 
ISTotwithstanding the fact that the city population has 
increased to an enormous extent, the agricultural area in 
the United States has increased more rapidly in propor- 
tion. In 1790 there was about three per cent, of the 
total population in cities; in 1890 there was about 
thirty per cent. But the area of cultivation, including irri- 
gated land, amounted in 1890 to about 357,616,755 acres; * 
while there were left five hundred millions of acres of des- 
ert and grazing lands, seventy millions of coal lands, and 
eighty millions of timber, and probably one million square 

* In 1900 total area of farms 841,201,546 acres, of which 414,793,191 acres were im- 
proved. 



ECONOMICS. 87 

miles of the territory still unsettled. The total amount 
taken up by farms "was 623,218,619 acres. The enormous 
extent of agricultural area enables the country to support 
its agricultural population, its immense city population, 
and to furnish a large proportion of the breadstuffs of 
Europe. 

The aggregate number of families in the United States 
in 1890 was 12,690,152, of which 4,767,179 were farm 
families; the remainder, of 7,922,973, were home fam- 
ilies. By home families is meant those representing 
habitations in cities and towns. Of these farm families, 
3,142,746 owned their homes, and 1,624,443 were 
tenants. Of those jDersons owning their homes, 2,255,- 
789 were free from incumbrances and 886,957 had 
more or less incumbrances. That is, the farm-owning 
population represented 65.92 per cent, of the whole, 
renters or tenants 34.08 per cent. ; and of the total num- 
ber of farms owned, 47.32 per cent, were free from in- 
cumbrance and 18.60 had incumbrances. 

This is far better than the showing of the city popula- 
tion; for of these 32.98 per cent, owned their homes, 21 
per cent, of them being free from incumbrances, and 
11.98 per cent, having incumbrances, while 67.2 per cent, 
were tenants. 

In Kansas there are 57.56 per cent, of farm families 
in proportion to 42.44 of home families. In Iowa 52.88 
per cent, are farm families, with 47.12 per cent, of home 
families. The largest proportion of farm families in any 
State in the United States is found in ISTorth Dakota, 
with 73.35 per cent. ; South Dakota, with 70.52 per cent. ; 
Oklahoma, 69.33 per cent.; Mississippi, 66.80 per cent.; 



88 ECONOMICS. 

and Texas, 60.49 per cent. The smallest is Massachusetts, 
with T.21 per cent, of farm families and 92.79 per cent, 
of home families. Much of the farming land occupied 
to-daj has not been cultivated to its fullest extent, but as 
intensive agriculture is employed the productivity of the 
soil will be greatly increased. 

Variety of Agricultural Products. 

The United States has a wide variety of products, on 
account of its temperature and semi-tropical territory. 
In this wide extent, from the cereals of the ISTorth to the 
tropical products of the South, we find a great variety 
of fruits and grains. 

As demand for variety of foods has increased, there has 
been a marked tendency to develop diversity in agriculture. 
Instead of sections devoting themselves entirely to wheat, 
to corn, or to fruits, there is a tendency to raise all of 
these to meet the irregular demands for products. ISTever- 
theless, corn predominates in such States as ISTebraska, 
Kansas, Iowa, and Illinois, while wheat predominates in 
Minnesota, Wisconsin, Ohio, and the Dakotas. In many 
sections of California where formerly wheat was almost 
the only crop, now fruit predominates, with a variety of 
other productions. The farmer is slowly learning that, 
because of the uncertainty of climate, and the variation 
in demand on account of the irregular foreign production, 
he should vary his crops, so far as the soil and climate 
will permit, to insure a successful return on part of the 
land, if not on all. This has the additional advantage of 
utilizing the varieties of soil that exist even on the same 
farm, while the alternation of crops on the same soil 
is necessary in many instances to preserve the land from 



ECONOMICS. 



89 



exhaustion. In considering economic conditions, scientific 
agriculture has done much to increase the productive 
yield of land. 

Stock-raising has continued in general throughout the 
United States. While an enormous stock production 
is still found on the grazing-lands of the West, still, 
a larger value of stock production is found on the smaller 
farms and special stock farms. When each farmer Las 
a few pigs, sheep, cattle, horses, and considerable poultry, 
for the market, the returns in the aggregate are immense 
from these sources. Stock-raising has become one of the 
most productive and certain occupations of the farm. 

Economic Effect of Machinery. 
The process of farming has been almost entirely trans- 
formed by the introduction of devices and machines for 
the cultivation of the soil. The small farms of the Atlantic 
seaboard were rough, and in the early period full of stones, 
sticks, and stumps of timber. It was necessary to con- 
duct farming by hand, or with small tools or machines, 
but the opening of the wide expanse of prairie land of 
the Mississippi valley enabled farmers to introduce ma- 
chinery for plomng, sowing, and harvesting, that are 
marvels to one not accustomed to their use. The eco- 
nomic effect is to lessen the cost of production. That is, 
one man can now accomplish as much with machinery 
as twenty men could formerly without. The whole popu- 
lation of the United States, with the old-fashioned ma- 
chinery, could not produce what is now produced by a 
third of the population, with modern machinery. One 
economic effect of this introduction of machinery is tliat 
a smaller population is being used in the production of 



90 ECONOMICS. 

raw material in proportion to that employed in making 
the finished product. Plehce a proportionately smaller re- 
turn to farm labor than to that of manufacturing labor. 

While the decrease in the cost of production is evi- 
dent, an enormous loss has been suffered on account of 
the rapid changes of machinery. As in manufacturing, 
the farmer who succeeds must keep up with the latest 
improvements or the cost of production will be greater 
than the price of his product in the market. Therefore 
the whole farming country is strewn with out-of-date 
machinery, which must of necessity be a great economic 
loss. 

Again, the lack of economy of consumption has also 
created a great loss. The old-fashioned farmer might 
lose a spade, or a hoe, or a plow, by carelessness and 
exposure to the weather, and the loss would not be con- 
siderable. But sun and storm and wind will destroy 
the modern complicated farm machinery, which represents 
an outlay of hundreds of dollars, more readily than it 
would destroy the old-fashioned instruments. Therefore 
to the farmer it is of prime importance that he economize 
the use of his machinery if he wishes a margin in farming. 

We may almost say that the agriculturist is a manu- 
facturer of products, the same as any other manufacturer. 
It is true, he has the land upon which to labor, and so 
does every other producer, to a certain extent. He re- 
ceives his assistance from nature in the fertility of the 
soil, though the miller may receive his from the water- 
power, and the manufacturer from mere occupation of 
the land. Hence, successful farming lies more and more 
in understanding the nature and preservation of soils 



econo:mics. 91 

and the adaptability of crops to them, a study of the 
best machinery, its care and use, and a careful study 
of the markets, to know what to produce and when to 
market it at a given price. 

Corporate Farming. 

Scientific methods have been used on very many large 
farms, and while small farming has usually been more 
profitable, because more largely introduced, it still re- 
mains true that a large farm, properly managed, can pro- 
duce more cheaply than a series of small farms. For each 
of the small farms must have its own set of machinery, 
its buildings, its special management, etc. Here, as 
elsewhere in all industry, combination, if there is suffi- 
cient brain-power exercised in organization, will enable 
a cheaper production. Just as the department store may 
sell goods at a lower rate, and make a profit, than smaller 
stores in competition, or as a trust or combine may fur- 
nish manufactured articles more cheaply than a number 
of factories in competition, so a large farm under corpo- 
rate management, where the territory would permit, miglit 
yield a larger return. But usually it does not, because 
of the lack of care in tilling every foot of the soil well 
and making it yield its utmost; while on the other hand, 
such care is frequently bestowed upon the small farms. 

The chief question in all of these industries is economy 
of consumption; or, in plain language, the lessening of 
expenses of handling the larger amount of the same grade 
of goods, enabling the employment of large machinery 
which lessens the cost of production, and the advantage 
of transportation. 



92 ECONOMICS. 

Irrigation. 

One of the best forms of intensive agriculture in modern 
or ancient times is that of irrigation. In the valleys 
of the Euphrates and the ITile, in India and Spain, this 
method furnished in ancient times a food-supply for 
many millions beyond the valleys in which the crops Averc 
raised; and especially in modern times in the western 
part of the United States, in the so-called arid region, 
irrigation has been carried on with great success. Irriga- 
tion contributes to the density of population, and there- 
fore develops a better system of industrial cooperation, 
which yields a higher return of economic product for 
the labor employed. 

Irrigation will not only allow the use of lands that 
could not otherwise be called into service, but by proper 
use of lands of insufficient rainfall they may be made 
to yield a larger return for the labor and capital ex- 
pended. It has been demonstrated that agriculture is 
an industry of diminishing returns. The whole trouble 
with it as an industry is, there is a limit to the amount 
which an acre will yield. You may double the capital 
and double the labor, but it is quite unusual to double 
the return. Therefore the importance of irrigation is 
to increase this yield beyond the ordinary return, with 
comparatively little labor. Thus it is that farm lands 
are made to yield a larger return each succeeding year, 
although it may be a larger return in quantity and not in 
exchange value. It is this intensive agTiculture which 
prevents in a measure the population from overtaking 
the food-supply. Malthus demonstrated that unless there 
were positive and preventive checks on the population 



ECONOMICS. 



93 



which increases in a geometrical ratio, it wonld in time 
outran the food-supply which increases in an ra-ithmet- 
ical ratio. Among the various phases of a highly devel- 
oped civilization, none is more important than intensive 
agriculture as a check to over-population. It enables one 
acre to yield a much larger food-supply than it otherwise 
would. It is in line with scientific fertilization, which 
forces Xature to yield her bounties more freely. A cheap 
food-supply is beneficial to the human race and to all 
forms of jDrogress. By a cheap food-supply is meant 
the largest possible return of the land for the least j)ossi- 
ble effort, so that though the farmer may receive lower 
prices for his food, he is ultimately benefitted by being 
able to purchase manufactured articles at a lower price, 
for cheaper goods make cheaper manufactured articles. 
Suppose a man can by an ordinary method raise two 
bushels of wheat a day and another man can in the same 
time make a hat which is exchangeable for two bushels 
of wheat : if by the improved process of irrigation the man 
is enabled to raise four bushels of wheat in a day and 
the man can make a hat in the same time which is ex- 
changeable for the four bushels of wheat, they are each 
advanced in wealth by the sum of two bushels and a hat. 
Their amount of wealth is increased, their well-being has 
been advanced. 

One of the important effects of a cheap food-supply 
in the Old World was dense population. Owing to 
the cheapness of food the population multiplied rap- 
idly, and in the imperfect form of government this cheap 
food developed despotism. A few individuals could under 
these circumstances rule the masses. But under enlight- 



94 ECONOMICS. 

ened government there need be no fear of a race of serfs. 
All densely populated districts are in danger of the op- 
pression of had government, although the possibility is 
for the best government. In a country where the people 
are jealous of their liberties there can be no danger of 
the development of despotism on account of thickly pop- 
ulated communities. Indeed, the permanency of agricul- 
ture tends to develop permanent social and political rela- 
tions. And one of the chief economic as well as social 
blessings is that the yield shall be permanent. A farmer 
practicing irrigation knows about what his income will 
be each year. That is, he rises above the uncertainty of 
drought and the fickleness of climate in general. 

But what will be the Effect of Irrigation on Prices? 

In general, prices are regulated according to the law 
of supply and demand, or, more specifically, by the mar- 
ginal cost of productivity; and if a large amount of agri- 
cultural produce is thrown upon the market it will have 
a tendency to lower prices, until through the development 
of other industries it should be absorbed. But a small 
amount of irrigable land in the United States could 
scarcely be the controlling element in the establishment 
of prices. Should Kansas develop the arid lands of the 
West, she would be able to throw agricultural products 
into Eastern markets and the markets of the world more 
cheaply than could be done by agriculture in eastern Kan- 
sas, Missouri, or any other territory where irrigation is 
not resorted to. The products of the irrigable lands 
would receive the same price, regardless of the cost of 
production, as those of other lands, where the cost of 
production is greater. The result would be that larger 



ECONOMICS. 95 

profits -would come to the irrigated land, or else prices 
would fall. Should irrigation be carried on to such an 
extent that the farm produce should be increased suffi- 
ciently to cause a fall in prices, the poorer classes of 
farms would go out of use, while still the irrigated lands 
would continue to be cultivated at a profit. Whichever 
result might occur, the irrigated lands Avould profit at 
the expense of other territory, less favorably situated. 

A high state of industrial organization can only occur 
in relatively dense population, and the rapid accumulation 
of wealth is dependent upon a highly organized com- 
munity. The separation of producers into natural classes 
and their subdivision into specialized labor represent one 
of the most potent means for the accumulation of wealth. 
A successful division of labor can only be had in a rela- 
tively dense and well-organized community. This is 
marked not only in the utilization of labor, but also of 
capital. Capital seeks its best use and highest remunera- 
tion in a company of diversified industries and interests 
represented in a highly organized industrial community. 

General Results of Irrigation. 
Thus we shall find that irrigation may become a means 
of developing a permanent industrial life; of reducing 
uncertainty of agriculture to certainty; of removing rest- 
lessness and discontent. It will furnish a means of de- 
velopment of a higher industrial organization, including 
a division of labor, which will furnish a means of the 
rapid accumulation of wealth. It will insure better edu- 
cational facilities and a higher educational standard. It 
will develop better social conditions. It will elevate the 
religious life and develop the religious nature. It will 



96 ECONOMICS. 

furnisli an opportunity for a higher political development, 
which shall be conducive to good government and the ad- 
ministration of justice. Therefore, with better schools 
and churches, with better means of social enjoyment, 
with a more perfect and satisfactory government, with 
good roads for rapid communication, with the use of the 
telephone and electric light, with a better water-supply 
and a more perfect sanitation, with a daily mail carrying 
the news to every farm-house, all of which are dependent 
upon a relatively dense population, farm life will be 
made the most attractive and wholesome life of the land. 
And these conditions brought about by irrigation may be 
extended to the fertile districts receiving sufficient natural 
rainfall, until we shall find that farm life, so uncertain and 
unattractive in the past, shall become the most attractive 
of all occupations, on account of its freedom and its 
social and political conditions. Then let us hope that 
the young man will return from the college to the farm 
and help his fellow in building up the most free, en- 
lightened and attractive communities found anywhere in 
this broad land. It is dangerous to prophesy, but I will 
venture the conjecture that within fifty years in the United 
States there will be a change in the attitude of young men 
of good ability. Instead of seeking the law and medicine, 
and commercial and educational positions, they will return 
to the farm, where they will find full scope for their 
educated abilities in the industrial, social, economic and 
political life which it offers. 

Forests and Fisheries. 

As land considered as a factor in production includes 
all of nature, we find that one product of America has 



ECONOMICS. 



97 



been greatly neglected. The enormous waste of the 
spontaneous growth of forests in the early agricultural 
history of the nation reached the extent of prodigality. 
The axe and the firebrand made way for the crops of 
corn and wheat. 'No attempt was made to save growing 
forests and leave a source of enormous wealth to succeed- 
ing generations. We have no wise timber laws in the 
United States for the protection and cultivation of forests, 
as they have in many of the states of the Old World. 
Some few laws have been made for encouraging the plant- 
ing and care of forests, but they have had but little in- 
fluence. There are, however, some public parks in the 
United States which are termed Indian and military res- 
ervations, having the protective care of the United States 
Government, and some care has been taken to protect 
some of these parks from devastation. But the saw-mill 
has penetrated the great forests of the West and North- 
west and taken out the best of the timber, and destroyed 
that which was young and growing. The waste of forests 
can scarcely be estimated. 

Twenty-five billion cubic feet of wood is consumed 
annually in the United States, which is more than the 
forests of the United States annually produce. That is, 
it is equivalent to the wood-growth of five hundred million 
acres, which is far in excess of the forest acreage of the 
United States. It would be wise in the Federal Grovern- 
ment to oversee the forests on lands yet unoccupied, and 
to preserve them. Foresters should be appointed to 
market the wood and care for the growing timber. 

The United States has been more judicious in the es- 
tablishment of fisheries for increasing the fish food-supply 
-7 



98 



ECONOMICS. 



of the United States. Nothing is more important than 
the stocking of our lakes and streams with fish to make 
up for the loss entailed by constant consumption. Every 
effort of the Government to increase the universal supply 
of food advances the means of civilization. It improves 
the economic conditions of the nation and is of vast im- 
portance in the shifting of economic conditions. 

Land Tenure. 

Whether the United States would have done better to 
adopt a different form of land tenure, by which the nation 
retained a large domain of forest and arable land which it 
could exploit by tillage or rental for the increase of the pub- 
lic revenue and the prevention of too rapid increase of agri- 
cultural area and the wanton destruction of forests, is not 
easy to determine. It was customary for the nations of 
the Old World to have such a domain. England, through 
the influence of economic writers, — among Avhom was 
Adam Smith, who pointed out the failure in the adminis- 
tration of these lands, — ^gradually abandoned the idea of 
national holdings. 

In the Roman system the ager puhlicus was a source 
of great contention, distrust, and political corruption. 
The Spanish nation in its colonization had a method of 
setting apart a portion of the territory for the payment 
of the expenses of government. 

The United States established a policy of small farms 
in the beginning. In the colonial period there was a 
tendency to adopt the European system, which descended 
from the feudal custom of having large tracts with small 
tenant farmers. But this system could not survive under 
the spirit of American institutions. As above stated, the 



ECONOMICS. 99 

law of 1787 wliicii provided for the survey of public 
lands in the ISTorthwest Territory favored the division of 
the land into small farms, allowing any person who desired 
a farm to purchase it at a minimum price of the Govern- 
ment. The ISTational Government has received large 
amounts from the sale of these lands for the support of 
the public treasury. 

In the case of the admission of new States, two town- 
ships of land were devoted to the foundation of a uni- 
versity, and two sections out of each township for the 
support of the public schools. This, with little variation, 
has been the rule in the case of all States since 1803, 
when Ohio became a State. Again, in 1861, two town- 
ships of land were donated to every State in the Union 
for the founding of an agricultural and mechanical col- 
lege. Other lands have been devoted to internal improve- 
ments. 

The policy of the United States has been to sell to 
private individuals the great bulk of our agricultural land. 
These lands are nearly all taken, and succeeding genera- 
tions cannot hope to greatly extend the agricultural area, 
but must be content with intensive cultivation of farming 
lands already in use, or must find occupation in other 
pursuits. 

This fact of the growth of population and the lim- 
itation of the extent of agricultural area, coupled with 
the fact that the present possessors of the soil are o^^^lers, 
and therefore new generations have no right or title to 
the land which their fathers found and occupied, except 
through inheritance or purchase, have led many enthusiasts 
to advocate land nationalization. They base their argu- 

LOFC. 



100 ECOITOMICS. 

ments upon the theory of the natural right of man to an 
equal share in the soil which God has given to the whole 
people and not to any particular class. They advocate 
land nationalization, or that all the land be in charge of 
the Government, and that individuals should hold or rent 
their lands of this landlord, who represents the whole 
people; that the rental paid should go into the treasury 
in lieu of taxes. While there seems to be a grain of 
justice in such argument, the whole plan appears to be 
impracticable. The United States, having adopted another 
policy in the disposition of our public lands, will find it 
no easy task to reverse the plan by an entirely opposite 
method. Whether it might have been better to adopt 
a plan of land nationalization in the beginning, is a 
disputed point. It might safely be said, however, that 
the Government could have been less prodigal with her 
lands, developed the agricultural area less rapidly, and 
yielded a larger net product of the industry of the nation 
in proportion to the expenditure. 

References: Walker, Francis A., Land and Its Eent; Oom- 
mons, J. R., The' Distribution of "Wealth ; Ricardo, David, The 
Principles of Political Economy and Taxation ; United States 
Census, 1890 and 1900 ; Mead, Ell wood, Irrigation Institutes. 



ECONOMICS. 



101 



CHAPTEK III. 

LABOR AS A FACTOR IN PRODUCTION. 

Service of Labor. 

It is primarily only tlirough the power of labor ap- 
plied to land or to the forces of nature that finished 
products called wealth, are created. Labor is human ex- 
ertion directed toward the production of wealth. It may 
be either directly or indirectly occupied in the process 
of production. Labor is either j)hysical or mental; it is 
the " aggregate of those mental and physical capabilities 
existing in the human being, which he exercises when- 
ever he produces a use value of any description." The 
person who is creating, either directly or indirectly, a 
product which is exchangeable in the market, or who is 
rendering some service to be sought for and paid for, is 
a producer of wealth or economic goods. According to 
Mr. Roscher, labor is usually employed in the occupation 
of nature's products, such as the taking up of natural 
fruits, fertile land, mines and forests, as well as mineral 
springs and other natural products of nature. Second, 
in invention and discovery. A great part of man's time 
is spent in devising new methods of operation, and con- 
siderable time is spent in the discovery of new elements 
of nature as well as their effects upon economic life, and 
also in extending the territory and increasing the number 
of nature's products. Third, labor is employed in creating 
raw materials by the manipulation of nature's forces, 



102 ECONOMICS. 

such as the raising of timber, grain, wool, flax, cotton, etc. 
Fourth, by changing raw materials into finished products, 
such as the manufacture of machinery from the products 
of the mine and the forest. Fifth, distributing things al- 
ready produced, giving them place value by bringing them 
near the consumer; and sixth, exchanging wealth prod- 
ucts, so as to satisfy wants and enhance the value of arti- 
cles. Seventh, securing the person of the individual, by 
laws, government, and police force, while he is engaged 
in all these processes; that is, the protection of the state 
and society. Eighth, imparting instruction, either relig- 
ious or secular. JSTinth, directing the labor of others, 
which is among the most important phases of economic 
production. And finally, making laws for the protection 
of the people and their general welfare. In these principal 
occupations labor finds its service and from them receives 

its reward. 

Extent of the Labor Force. 

The progress of a community in wealth-making, other 
things being equal, depends upon the extent of the labor 
force. Up to a certain point a community is productive 
according to the extent of the labor force. This labor 
force will be great as the population is large, if we con- 
sider a long period of time. And by this extent of labor 
is meant the number of hours actually employed in 
rational service, as well as the quality of the labor. In 
some nations this labor force is very great, according to 
the population as it is marked by few deaths rather than 
by multitude of births. In another way the restriction of 
emigration and the encouragement of immigration of able- 
bodied persons will have a tendency to increase the labor- 



ECONOMICS. 103 

power. Also, this labor force is estimated in proportion 
to the small number of idle and inefficient persons in com- 
parison to those who are self-supporting and able-bodied. 
Again, it may be further stated, that for efficiency of 
labor force the number of males should to a certain extent 
exceed the number of females. In considering the number 
of idle and inefficient, it will be found that persons 
between fifteen and seventy years of age represent 
the strongest labor force. In France, 68.06 per cent, is 
numbered between these ages. In England, 61.02 per 
cent. ; in Germany, 62.07 per cent. ; while in the United 
States only 59.06 per cent, are between the ages of fifteen 
and seventy, — ^^showing the efficiency of the labor force in 
France in proportion to the population as compared with 
the United States and other countries. The relative 
efficiency of nations may gradually change. It ap- 
pears also that the number of defectives, dependents and 
delinquents of the United States is large in comparison 
with France and other countries. In the United States 496 
out of every 100,000 belong to this class, while in France 
405, Belgium 226, Sweden 407, IS^orway 532, Great Brit- 
ain 452, Germany 410, Italy 343, of each 100,000, belong 
to this class. This is a statement of our economic condi- 
tions, rather than a sociological defect, as in the case of 
the United States the defectives are carefully enumerated 
and well cared for. 

Quality of the Labor Force. 
While much depends upon the extent and general char- 
acter of the population for effective labor-power, the quality 
of the labor has much to do with its efficiency. Thus, 
strong, temperate, industrious men yield a larger return 



104 



ECONOMICS. 



in the production of wealth than weak, intemperate and 
shiftless laborers. It is evident that a class of laborers 
enervated bj living in a warm climate will not do as 
much work as those of a temperate climate, on account of 
the languor which possesses them. The spirit of the laborer 
is also to be considered : a well-kept, well-fed, independent, 
and happy, or at least contented laborer, is of far greater 
economic value than a poorly fed, poorly clad, discontented 
individual. Grood wholesome food and a sufficient amount 
of it are conditions necessary to the best quality of labor. 
Also, the native strength of laborers has much to do with 
their efficiency in production. The character and quality 
of work done depend upon the spirit and will-power of 
the laborers, and these, in turn, depend largely upon the 
moral and intellectiial characteristics. Wliile labor is 
divided into intellectual and physical, even physical labor 
must have intelligent direction; therefore the intelligence 
of the laborer has much to do with his efficiency. There- 
fore, for the best service of labor, it is eminently proper 
that supervision should be had over sanitary conditions, 
the homes, the kind of food employed, and social condition 
of the laborers, in order that their highest service may 

be obtained. 

Various Grades of Labor. 

The lowest grade of labor that is employed is slave 
labor, for the slave has no interest in the amount or 
quality of the work done. He has no interest in the fin- 
ished product and no interest in the care of tools or prop- 
erty ; having no political or social status, he does not work 
with hopeful energy. In the ordinary wage system a 
higher grade of skill is possible than in slave labor, be- 



ECONOMICS. 105 

cause the individual has political and civil rights guaran- 
teed to him. He is his ovsm master, and able to make his 
o\^Ti contract. His pay, instead of being determined by 
the lowest animal wants, is determined by the kind and 
character of the work done. ^Nevertheless, in modern 
times we do not find him a contented and hopeful laborer, 
on account of the uncertainty of employment. And it is 
somewhat to his discredit that he has less interest in the 
quantity and quality of the work done and the care of 
materials and tools than he ought to have. While in one 
sense his interests are identical with those of his em- 
ployer, he has not always worked in his employer's in- 
terest. 

The piece wages system or the piece price plan is in 
some respects of a higher order than the wage system, 
for in this case the pay is determined by the actual amount 
accomplished and the individual receives greater encour- 
agement while the work lasts; having an interest in the 
amount done, he puts forth all of his energies, which un- 
fortunately frequently sacrifices quality and character of 
service. 

Men who are employed in profit-sharing or in co- 
operation have the highest ideal system of labor. While 
they have the privileges of the highest grade of wage- 
earners they also have a direct interest in the care of tools 
and material, and in the amount and quality of service 
rendered. They have also an interest in the surplus earn- 
ings of capital and labor over and above actual wages paid. 
This gives them a hopeful and cheerful disposition. Wher- 
ever cooperation can be successfully carried on, it has 
a tendency' to enhance the efficiency of tne labor-power 



106 



ECONOMICS. 



and to raise the standard of life, thus creating better social 
conditions. But it seems scarcely possible that this can be 
entered into under all circumstances. 

Division of Labor. 

The quantity of wealth produced is greatly increased 
by the division of labor. This increases its utility in every 
"way, although not without certain economic defects. By 
the division of labor is meant, that each individual, instead 
of attempting to obtain directly or create all of the goods 
which he needs for consumption, performs a small part 
of the creation of a single article and exchanges this 
service for the supply of all his other wants. By this 
method the time of apprenticeship is greatly shortened, 
and the laborer soon develops extraordinary dexterity or 
skill in performing a single service. There is also a 
great saving of time, for each individual is kept in a 
single place and in a single service; for the same reason, 
it is a saving of mental and physical strength. Division 
of labor also furnishes an opportunity for the distribu- 
tion of abilities; as men are endowed vidth different 
characteristics and capacities which fit them for dif- 
ferent occupations, so the division of labor makes it 
possible to fit each one to his proper place. Each one 
seeking to perform a single service in the easiest possible 
manner has facilitated invention. It prevents waste and 
saves interest and insurance by direct service. It is the 
concentration of the attention of the laborer on a single 
process that enables him to devise methods of saving labor. 
The improvements in the steam engine, in taking the seeds 
out of cotton, in the equipment of shoe factories, cotton 
mills, and iron and machine shops, have come about in 



ECONOMICS. 



107 



this way. The machine grows from a simple, clumsy 
device, to a complex, perfectly acting instrument, by the 
perfection of a single part at a time. Division of labor 
allows women and children and ''half-men" to work, thus 
enabling them to contribute to their own support, economiz- 
ing the labor force of a community. 

But it is not without its evil effects, for in forcing the 
mind to perform only one service it has a tendency to 
make the laborer narrow, to decrease his general intelli- 
gence, and to render him unacquainted with the relation 
of things. It also tends to a closer competition of labor^ 
and for a time hinders the mobility of occupation; but 
this is gradually being broken down, because of the ex- 
cessive division of labor and the use of machinery which 
renders it possible for a laborer to learn in a few days 
or a few weeks the processes of a single occupation. The 
chief danger of the excessive division of labor has been in 
the excessive inducements offered to children to work long 
before they are readj^ for the ordeal. This has been pre- 
vented to a certain extent in modern times by restrictive 

laws. 

Cooperation of Labor. 

All laborers appear to be competing with one another 
in general, and especially within the different groups. The 
rate of wages is determined to a certain extent by the 
number of laborers demanding employment in comparison 
to the number sought, or, in other words, upon the law of 
supply and demand. Hence, when a vacancy occurs where 
ten laborers are needed, a hundred immediately appear, 
seeking the position. Yet in the creation of wealth all 
laborers are working unconsciously together in making 



108 



ECONOMICS. 



goods more abundant, and consequently cheaper, and 
the means of life more satisfactory. Yet laborers, 
observing the competition in the market, have sought to 
cooperate with one another in obtaining a higher rate of 
wages and in the satisfaction of social and economic needs. 
In doing this they have rendered one another great service 
in keeping up the standard of life, and, by agitation and 
education, advancing the rate of wages. 

Increased Productivity of Labor. 

Labor has thus continually increased its productivity. 
Introduction of the machine and modern processes of pro- 
duction have enhanced the power of labor to create eco- 
nomic goods. By the aid of machinery, labor can accom- 
plish more now in an hour than formerly in a lifetime. 
It is true that this is dependent somewhat upon the aid of 
capital; but in some industries labor does the greater 
part of the work, while in others capital performs the 
greater service and labor does but little. One of the 
complaints of labor in modern times is, that it has not 
received a fair share of the product of industry caused 
by the increased production consequent upon the use of 
machinery, the skill of labor, and a higher standard of life. 

Improved Condition of Labor. 

It will be found, however, that the laborer's wages have 
increased gradually from decade to decade; and this is 
evident from the improved condition of labor. The homes 
are better ; the improved intellectual and moral conditions 
of labor are evident everywhere. Better food, better cloth- 
ing, and better home comforts, represent the improvement 
of labor during the past fifty years. It must be remem- 



ECONOMICS. 109 

bered in considering these questions, that periods of de- 
pression in which thousands of Laborers are thrown out 
of employment must be considered as abnormal conditions, 
and in the economic sense the average improvement of the 
laborer must be taken as the basis of measurement of his 

w^elfare. 

Labor Organization. 

To a large extent this has been due to the exertions of 
the laborer himself. Improve the condition of a laborer 
and he will command a higher rate of wages ; pay him a 
higher rate of wages and he will have the means of im- 
proving himself. Thus is perpetuated a favorable condi- 
tion of labor. But it is through labor organizations that 
more has been done to educate the people to consider favor- 
ably the demand for better wages. Possibly wages have 
been advanced through strikes and close organization ; but 
chiefly through the development of temperance, the im- 
provement of the general social condition, the increased 
intelligence of the laborer, making him a better laborer, 
improvement in wages has taken place. Labor organiza- 
tions have sought to create a monopoly of labor to compete 
with a monopoly of capital. They have tried to shut out 
of a given field all laborers not belonging to their organiza- 
tion. Yet labor organizations have not been without their 
own defects, as they have failed to develop a broad and 
catholic spirit among laborers, and in spite of their educa- 
tion have failed to realize the best results of broad citizen- 
ship and intelligent humanity. They have developed a 
selfishness which has in many respects been detrimental 
to their best interests. 



110 



ECONOMICS. 



Protection of Labor. 

The world is slowly learning that the labor force of 
a community is its best wealth, and that it needs protec- 
tion. Those employers who look carefully to the interests 
of their laborers receive a large reward for their services. 
Laborers are receiving protection in very many ways. The 
laws guarantee them the right now to organize, to assemble 
peaceably, and to strike when their interests seem to de- 
mand. There was a time when these privileges were not 
permitted. Again, they are protected by law from injury 
by machinery, and foul air, and are secured in their rights 
to a share of the finished product as wages; in fact, are 
protected in all of their rights and privileges. 

Labor Laws. 

A careful glance at the numerous labor laws which have 
been enacted in our leading States, especially in Massa- 
chusetts, which provide for sanitary conditions of build- 
ings, for the protection of life and limb, for the guarantee 
of the wages of the laborer as a first lien on the product, 
for the security of the rights of contract, and many other 
matters, show conclusively how well laborers are protected 
by law. Gradually each year we find everywhere measures 
enacted for the protection of the laborer in mines and fac- 
tories. The establishment of labor commissions in over 
thirty States of the Union for the purpose of gathering sta- 
tistics and information concerning the condition of labor^ 
has had a vast deal to do with the amelioration of the condi- 
tion of labor and the protection of the laborer. Through 
these statistics and the united efforts of laborers many laws 
have been enacted in their favor. Here as elsewhere, in all 
remedial legislation, grievous errors have been committed, 



ECONOMICS. Ill 

which can only be remedied by time and increased intelli- 
gence on the part of the laborers who make the demands 
and on the part of legislators and philanthropists who 
endeavor to advance their cause. 

Eight-Hour Law and its Effect on Production. 

Strenuous efforts have been made by labor organizations 
to raise the rate of wages and to reduce the number of 
hours of labor. It may be stated as a fact, that the general 
well-being of society would be promoted if each individual 
would labor eight hours a day, provided that this labor 
could be faithful and continuous and that the remaining 
portion of time not used in sleeping and eating should be 
devoted to self-improvement and wholesome recreation. 
The rapidity of the production of wealth in the world has 
not always conduced to the highest well-being of society, on 
account of the sudden changes that occur in economic life. 
While a large number of people labor at excessive hours, 
others are falling short of this average to a considerable 
extent, but it is the service of labor rather than its amount 
that yields general social well-being. 

The economic effect of suddenly changing from ten to 
eight hours would be diverse in different industries. In 
some instances, where the labor is severe, more would be 
accomplished in eight hours than in ten; while, on the 
other hand, where time and the use of machinery are 
chief elements, less would be accomplished in eight hours 
than in ten. Taking an average of industries, it will be 
found that less will be accomplished in a day of eight hours 
than in one of ten ; while considered by the hour, more will 
be performed in a given hour in an eight-hour day than 
in a ten. In considering the change from a ten- to an 



112 



ECONOMICS. 



eight-hour day, people seldom consider the effect on general 
production. If the same could be accomplished in eight 
hours as in ten, the question arises as to whether there 
would be an increased employment of the number of men ; 
if the demands of production can be accomplished in eight 
hours as well as in ten, the shortening of the day would 
not, as the unionists hope, give room for an increased 
number of laborers. On the other hand, if less can be 
accomplished in eight hours than in ten, will not wages 
necessarily fall by the day though they may rise by the 
hour? The question involves many economic considera- 
tions, for it must consider the amount of capital seeking 
employment, and the increase or decrease of the number 
of laborers seeking employment, and the effect on wages; 
it must consider the amount of increase or diminution, of 
the total product of industry, and the increase or decreiise 
of the amount of land used in obtaining the product and 
the rent of the same; and finally, it must include the 
increase or decrease of the rate of profits which accrue to 
the managers of the business. It will be seen that the 
real economic effect is determined by its relation to all 
productive and distributive industries. Whereas a general 
benefit would be derived if such a change would take place, 
it is difficult for the laborer to realize such a benefit in the 
form of increased remuneration for his services. If such 
a change takes place it should occur gradually, so that 
different industries could be adjusted to meet the new 

conditions. 

Restriction of Immigration. 

The great attempt of labor unions to limit the number 
of laborers entering a given field and thus create a monop- 
oly of labor, has been a cause frequently urged for the 



ECONOMICS. 113 

restriction of immigration. As wages would depend upon 
the number of laborers seeking employment in comparison 
with the demand, if laborers should be kept out of a nation 
bj means of a well-regulated law it certainly would have 
a tendency to raise wages. Efforts have been made on the 
part of the United States to keep out the low-grade labor 
of China, and, more recently, other countries of Europe. 
It ap2}ears that if labor is to be protected in our own nation 
and a higher standard of living is to be preserved here 
than that which obtains in the Old World, it is necessary 
to establish some restriction of this kind. One of the 
arguments for keeping up this standard of life and raising 
the wages of laborers, used by certain politicians, is to 
institute a high protective tariff which will develop the 
industries of the country, make a demand for labor, and 
thus increase wages. It is difficult to see how this can be 
effective except in a very general way. The question will 
be further discussed under Taxation. 

References: Walker, Francis A., Wages ; Ely, R. T., The Labor 
Movement in America ; Howells, Conflicts of Labor and Capital; 
Mallock, Labor and Popular Welfare ; Walker, Francis A., Political 
Economy ; J. F. Stimson, Handbook of the Labor Law of the United 
States. 



114 ECONOMICS. 



CHAPTER TV. 

CAPITAL AS A FACTOR IN PRODUCTION. 

Nature of Capital. 

While labor took the initiative in the process of produc- 
tion, capital is absolutely necessary in nearly all forms of 
modern production. Having its origin first in labor, it 
finally in turn supports labor in the process of pro- 
duction, and may even limit the amount of labor that 
may be employed in a given territory. In the building 
up of industries, labor logically preceded capital; but in 
the practice of modern production, capital takes the initia- 
tive. Thus, labor first produced wealth, and the part of 
wealth set aside for the purpose of creating more wealth 
was called capital. All wealth which is not used directly 
in consumption as such, without regard to the creation of 
other wealth, may be called capital. Capital is the wealth 
set aside with the determination of use in the process of 
production. But capital itself is consumed more or less 
rapidly, for in every process of production, although it is 
consumed it reproduces itself. The whole body of capital 
is consumed rapidly, and reproduces itself rapidly; so that 
the existing capital of the world is of very recent origin. 
Capital is said to be material, or immaterial ; some persons 
classifying as immaterial capital, good-will in business, 
credit, superior skill, etc. But these could nearly all be 
referred to some other category rather than to capital. Al- 



ECONOMICS. 116 

though this is a question of dispute, it is better to classify 
all capital as material, and objective. 

The forms of material capital are generally included 
in — first, materials to work up, tools to work with; and 
subsistence, as given by Mr. Walker. A more analytic 
classification gives the forms of material capital as follows : 
Improvements upon land, as well as all buildings, streets, 
and roads; tools, instruments, and machines; useful do- 
mestic animals ; materials for manufacture which reappear 
visibly in the product; food and clothing for the support 
of laborers ; materials for manufacture which will not re- 
appear in the product; stocks of goods for sale; money; 
means of transportation; and weapons for defense. 

Non-Capital Wealth. 
It will be seen from this that the wealth used otherwise 
than in the form of capital is comparatively small. But 
the fundamental idea in capital is, that it shall either yield 
a revenue, produce more wealth, or provide for a future 
income and future enjoyment. The whole tendency seems 
to be to make capital that form of wealth which is set 
aside for the satisfaction of future needs; while non- 
capital wealth is that which is used for immediate consump- 
tion, without regard to future use. Considered in general, 
this is the essential definition of capital. However, 
wealth may be lying idle in the bank, with the intended 
use of production, which would be classified as capital. 

Saving and Abstinence. 
Writers have frequently asserted that capital arises from 
saving and abstinence, and, whether intentionally so or 
not, have conveyed the idea that capital arises out of sacri- 



116 



ECONOMICS. 



fice or parsimony. But the real truth is, that capital is the 
surplus over and above the amount consumed, which is 
again turned into business in wealth production. The 
word "saving" is all right if properly understood. It is 
simply refraining from the use of wealth in one 
way, that it may be used in another. It is the 
intention always to use capital, but not to consume it 
without leaving its equivalent plus a marginal return in 
some form of wealth. There may be present self-denial 
for the sake of a larger future enjoyment, or the refusal 
to use wealth in one way that it may yield a larger 
amount of rational enjoyment in some other way. At any 
rate, economy of consumption has a tendency to enlarge 
the amount of capital. 

Fixed Capital and Circulating Capital. 

It has been convenient to classify the different forms of 
capital in regard to methods of consumption into fixed and 
circulating. The former includes all concrete forms of 
capital which are more or less permanently established. 
Circulating capital is that which is used in a single process 
of consumption, like coal, or raw material of any kind 
passing into the finished product. It must be understood 
that all concrete capital is consumed in the process of 
production, and that this classification is merely relative 
in regard to the time used in consumption. It is desirable 
that circulating capital should be consumed rapidly, in 
well-ordered production, and that fixed capital should last 
as long as possible. Thus, in the consumption of coal, 
wood, or any raw material, it is desirable that it should 
be consumed rapidly because this indicates rapid produc- 
tion; while it is desirable that machinery, buildings, 



ECOXOMICS. 117 

railroads, and all forms of fixed capital should last as 
long as possible. 

Specialized and Free Capital. 
Capital is again classified in reference to investment, 
into specialized and free. It is said to be specialized when 
it is bound up in a given business from which it cannot 
be withdrawn without loss. Thus, if a man should have 
$10,000 invested in a stock of boots and shoes, it would be 
impossible for him to withdraw this capital instantly and 
invest it in grain or flour without loss. He must wait 
the slow process of trade or sale. On the other hand, 
free capital is usually in the form of money or securities 
which are immediately transferable and are awaiting in- 
vestment. It takes a large amount of free capital to run 
any established business. And the amount of business 
which may be carried on is to a certain extent limited by 
the amount of available free capital. All new business 
must be developed through the use of available or free 
capital, upon whose service the business prosperity of the 
community is largely dependent. Unless it be plentiful, 
new business cannot be established ; and unless there be 
sufficient to run the old business, it will fail. Business 
communities have frequently suffered on account of the 
absorption of all free capital in given industries and a 
deficienc}^ of the supply to carry on business. "When large 
amounts of property pass into the form of fixed capital 
which fails to yield a return upon the investment, or when 
large amounts of capital are specialized in the form of 
stocks of goods or materials for which there is no immediate 
demand, business is in a bad condition, and there is danger 
of a commercial crisis, or trade depression. 



118 



ECONOMICS. 



Pure and Concrete Capital. 

When the term capital is used, it generally has refer- 
ence to what is known as pure capital, and not to the con- 
crete forms. For example, a merchant, when he talks of 
his capital, generally, estimates it as so many dollars, with- 
out reference to the concrete forms of his capital stock. 
A large proportion of his capital may be in the form of 
goods, such as bolts of calico and other forms of merchan- 
dise; but these may change from time to time, the same 
articles not remaining in the store but being sold and re- 
plenished by others, — yet the capital may remain the 
same. In this rapid manner pure capital is said to trans- 
migrate from one form to another. The largest proportion 
of capital is found in the concrete forms of economic goods 
or wealth, and the estimation of the value of these in terms 
of money represents the pure value. 

Accumulation of Capital. 

It is generally supposed that large masses of capital are 
handed down from generation to generation with no eco- 
nomic process except that of investment, but this idea 
is not correct; for although capital is saved, it is saved 
to be consumed, and replaces itself quite rapidly. Some 
authors have discarded the idea of the accumulation of 
capital, and have used the term growth of capital as pref- 
erable because of its constant power of reproduction, hold- 
ing that the increase of capital is largely analogous to 
the increase of population. The creation of capital depends 
largely upon the direction given to industry. Anyone who 
has command over a certain amount of free capital has 
a direct or indirect control of a corresponding part of the 
productive powers of industry. There are various ways 



ECONOMICS. 119 

in "which he may use this free capital. He may give em- 
ployment to labor in the development of industry which 
will enable capital to reproduce itself and perform a 
service in other ways. The capital will then be replaced 
with a margin of increase which is called profits. He 
might use it for immediate gratification by extravagant 
expenditure in costly suppers, but he prefers the former, 
and the result is the gro-\vth of capital. The process of 
the growth of capital consists in the increase of the fund of 
wealth from which savings may be made, and the determi- 
nation on the part of its owners to refrain from immediate 
consumption and divert wealth into the form of productive 
industry. The former represents the direct method of the 
creation of wealth, the latter that of saving it for future 
gratification. The desire for accumulation has been pres- 
ent in economic life, and has increased with the diversity 
of occupation. It is inherent in the nature of man, and 
influences largely the will in its determination not to 
consume goods but to preserve them for future use. 

Momentum of Capital. 

The services of capital in modern production have be- 
come so very great that its power actually increases 
with its own momentum. Many find fault with capitalists, 
as a class, because it appears that they are all working 
in combination against labor. In reality each one, like 
the laborer, is seeking to receive the largest return for 
services, either in present or future gratification. In 
present gratification he obtains this satisfaction by the 
lavish expenditure of wealth. He hopes to receive a larger 
future gratification by turning the wealth which he has 
in his possession into productive industry, and thus in- 



120 ECONOMICS. 

creasing his wealth and consequently the means of future 
enjoyment. Where a large number of persons, each pos- 
sessing wealth, enter a corporation and turn their atten- 
tion to productiA^e enterprises, each has an industrial 
power which is large in proportion to that possessed by 
the single wage-earner. This large number of men, moved 
by the same idea, the gratification of personal wants, 
make it appear that capitalists have all combined to carry 
out their own selfish aims. The momentum of capital in 
modern industry is great, and moving forward with its 
own inertia its cumulative power is evident. The power 
of capital, then, rests rather in its OAvn inherent nature 
than in the combination of any group of men called cap- 
italists. Others have uttered their objections to the 
modern system of capitalistic production, and, like the 
socialist, have advocated the shifting of the management 
of capital from a few hands into the hands of the state. 
But change as we may the management of capital, its 
power in production will not cease. 

Economic Significance of Capital in Production. 

Capital is not only essential in modern production, but 
frequently is a limit to productive industry. As it takes 
the initiative in constructing buildings and machinery and 
providing raw material, the amount of industry will be 
limited by the amount of available capital that may be 
thus used. It matters not what form of productive in- 
dustry may be practiced, — whether it is individualistic, 
socialistic, communistic, or cooperative, — capital is the 
essential feature to be considered in the beginning of 
any modern enterprise. Even those persons who begin 
a cooperative industry in any enterprise on the smallest 



ECONOMICS. 121 

scale must have room to work, material to work upon, and 
tools to work with, before they can accomplish anything. 
It was maintained by John Stuart Mill and other econo- 
mists that capital was used for the payment of wages, 
and that only a certain number of men could be employed, 
determined by the amount of capital devoted to that 
purpose, called a wage fund. But more recently it has 
been generally held that the laborer earns his own 
wages each hour, day or week that he works, and that 
capital merely provides the means of employment. But 
as the limited means of employment shows the lim- 
itation of laborers that may be employed, the effect 
is the same as if the theory of the wage fund 
were a fact. It is impossible to estimate the place 
of capital in production as compared with labor, but 
in the modern system of production capital has become an 
absolute necessity along with labor. 

References: Giffen, The Growth of Capital; Clark, J. B., Phi- 
losophy of Wealth ; Nicholson, J. S., Principles of Political Econ- 
omy. 



122 



ECONOMICS. 



CHAPTER Y. 

PRODUCTION INFLUENCED BY SOCIAL ORGANIZATION. 

Private Organization. 
Under free competition each individual seeks for the 
largest possible return for labor or sacrifice expended, but 
in seeking this return each works under limited oppor- 
tunities. Owing to the fact that there are several factors 
in production, — land, labor, and capital, — it is necessary 
that the various forces in production be organized bj 
some one in order that business may be carried on. One 
man owns the capital, another the land, and another has 
the right and control of his own labor. If these three 
were to come together, business might be facilitated on a 
small scale. But as a rule this question of bringing 
land, capital and labor into combined effort is settled by 
a group of people called managers of business, or, some- 
times, captains of industry. A person who has the power 
to labor for wages may not have the ability to conduct 
business, and possibly not the opportunity. Owing to 
the fact that large amounts of capital, labor and land are 
essential to most modern enterprises, it requires a large 
amount of business skill and ability to carry on such work 
successfully. But few men have the ability and skill to 
carry on a great business enterprise. These organizers 
of industry induce capitalists to loan their money, build 
machines and construct factories and provide the raw 
material, hire laborers and manage the business, return- 



ECONOMICS. 123 

ing to cajoital interest, to land its rent, to labor its wages, 
and retaining for themselves the profit of management. 
Here then we have a distinct class of people representing 
business management, the fourth great factor in produc- 
tion. Too much importance cannot be attached to this 
factor in the modern process, for after all, it is brain-power 
or successful management which more than anything else 
makes a business profitable or unprofitable. And it is the 
application of this superior skill which moves the wheels 
of industry and causes wealth to accumulate. 

Firm or Partnership. 

In private organization there have arisen from time to 
time different voluntary combinations of men who have 
been induced to organize on account of economic condi- 
tions. The development of these organizations, though 
in themselves voluntary, may be said to be natural 
on account of their essential outcome of previous condi- 
tions. In early times the manufacturer lived in his own 
home and gathered about him apprentices and helpers, and 
when articles were made he sold them from his own shop. 
He conducted his business alone, with a very small amount 
of capital and a comparatively small amount of labor. 
But after the invention of steam and the rapid development 
of other industries, industrial enterprises became much 
larger, and men began to associate others with them in the 
business of manufacturing or trading, and the partnership 
developed as one of the voluntary associations of modern 

production. 

The Corporation. 

As industry became more complex, enterprises became 
more extended and the establishment of industries which 
called for a still larger amount of capital became necessary. 



124 ECONOMICS. 

A larger number of individuals went into partnership 
in production, and in the establishment of banks, insurance 
companies, the building of railroads, and the development 
of land and mining interests. As a large number of per- 
sons doing business together without the personal respon- 
sibility for all, they became a menace to trade and general 
business. In order that these institutions might be legally 
created, and that the people might have protection, they 
were incorporated by the municipality or state. They 
were then in the form to sue and be sued, and they could 
then be to a certain extent under the control of law, be 
made responsible for indebtedness. It is not the place 
here to discuss the imperfections of franchises and of 
corporation law^s, or to show how through the carelessness 
of the governed and the faithlessness of the governing 
these corporations frequently became unjust machines for 
arbitrarily oppressing those who were not so carefully 
organized. The corporation came into use as a natural 
or essential voluntary organization of industry, as part 
of the mechanism of modern industrial life, and as such 
performs an immense service in production and at the 
same time wields great power in the political as well as 
in the industrial world. 

Trusts and Combinations. 

As industry developed and power manufacture increased 
through the extended use of steam, electricity, and water 
transportation, the industrial enterprises of the world be- 
came greater. Competition, which had been to a large ex- 
tent shifted from individuals to corporations, became a bat- 
tle of giants in production and distribution. Corporation 
was contending with corporation. The result of extra com- 



ECONOMICS. 125 

petition in industries and the cheapened methods of pro- 
duction caused a fall in prices. Certain institutions could 
not make fair returns on investments of capital, and so they 
placed goods on the market below cost of production. This 
created such a distrust in business and such a depression of 
prices that there arose a method of agreeing upon a fixed 
price of goods in a given line. This method of arranging 
a price for all goods of a given trade is a method of com- 
bination, and is for the purpose of allowing the least 
productive business in any given line to pay at least the 
cost of production, and the more favorably located 
institutions yield a surplus return. Sometimes com- 
bination has been made between manufacturers and 
transporters of goods for the purpose of arranging rates 
and controlling the market. 

But the most important and interesting phase of this 
subject is the extension of organization, in which all in- 
dustries in a certain line pass into a superorganization 
called a trust, in which general stock is issued in propor- 
tion to the amount each corporation puts in. So, having 
formed this trust, the unprofitable enterprises are closed 
and only a few of the more profitable are continued in 
business. If the business will warrant it, all of the 
different institutions are kept running. At any event, 
they are run or closed as will best suit the interests of the 
trust. Having assumed control of the entire manufactur- 
ing interests in a given line, the next step is to fix a 
monopoly price, in order to obtain monopoly profits which 
depend upon the market. The object to be gained is 
the largest net return for a given amount of sacrifice, 
labor, and capital. This is not easy to secure, for the 



126 ECONOMICS. 

law of supply and demand here enters the field as a de- 
termining power. This law assures us that if prices fall 
there will be an increased demand for goods, but not 
essentially in proportion to the fall. If prices rise there 
will be a falling-off in the demand for goods, but not 
essentially in proportion to the rise in the price. Expenses 
of management will increase in a certain proportion in 
respect to the amount of goods handled, and decrease as 
the number of articles handled decreases. The quicstion 
to be answered then is. At what price will the largest net' 
returns be secured? It is therefore not possible for a 
trust or monopoly to fix its price regardless of the de- 
mand, as it is limited in what it may charge for goods. 
Another limitation also on monopolies is found in the 
effect of prospective competition. If it be found that 
a trust has been making enormous profits in a given line, 
sufficient capital will be gotten together to compete with 
a trust, which of course makes the largest competitive 
units yet known. The threatened competition keeps 
prices within certain limits, which frequently brings them 
below monopoly profits. But more frequently the trusts 
themselves overestimate the market and fix the monopoly 
price above its normal rate, and thus injure their own 
business. It is possible for a trust or great monopoly 
to furnish goods to consumers at a less rate than they 
can be furnished under competition of a large number of 
establishments. If they would only consent to be reason- 
able and fair in their charges so as to make only reasonable 
income, there would be no better way of furnishing goods 
to consumers, for the price would be regular and cheaper 
than when furnished by competition of a large number 



ECONOMICS. 127 

of institutions. The chief danger of trusts is in the fact 
that they take undue advantage of the markets. They 
raise the prices of necessaries suddenly, before the in- 
fluence of j)rospective competition acts. It takes a long 
time to get business in motion even after it is planned, 
and the sudden raising of the price of sugar, flour or coal 
for a month will yield an immense income to a corpora- 
tion with such j)ower. This may be done in such a 
manner as to be little less than robbery of consumers, 
who must pay the arbitrary price of trusts. 

It is interesting to see what will be the result of this 
superorganization of industries. It has come about as 
an essential outcome of economic conditions, and until 
economic conditions change somewhat we cannot expect 
it to be finally disposed of. Men say they are obliged 
to combine in order to save business from destruction, so 
that everywhere we find the rapid development of trusts. 
Indeed, in nearly every great enterprise in the United 
States at present the trust finds its way, but owing to its 
irregular and loose organization there is a constant tend- 
ency to dissolution. While trusts are being formed rapidly^ 
they also appear to be going to pieces rapidly. 

AMiether the trust shall take its place as a legitimate 
part of economic organization, as did the corporation, or 
whether it will be gradually eliminated by the action of 
the law and possibly b}^ a survival of better methods, re- 
mains to be seen. It might be well to remark that capital- 
ists and business managers through excessive combination 
point out the way to socialism more than any other agen- 
cies, labor organizations not excluded, and by their actions 
demonstrate a possible necessity of extreme politico- 



128 ECONOMICS. 

economic organization. These facts influence many minds 
to believe that state socialism is one of the possibilities 
of the future. (See Bk. IV, ch. 2.) 

Effect of Organized Labor on Production. 

The organization of labor has a great influence on 
production, although the nature and extent of this in- 
fluence is not easily defined. For while the organic action 
of labor may on the one hand keep a steadiness in the 
labor market, it frequently counteracts this result by creat- 
ing a distrust in business, causing indirectly the discharge 
of many laborers who otherwise would continue to be em- 
ployed. More especially is this result observed in the 
timidity of managers to enter new business. Upon the 
whole, it may be stated that as labor organizations become 
more prominent and more steady in their organization and 
more reasonable in their demands, their effect is to make 
stability of wages and to a certain extent to increase the 
rate. The labor service is greatly improved in quality, 
which of itself tends to increase the amount and the value 
of the product of industry. Could laborers and managers 
agree upon a method of establishing wages, such as a 
sliding scale or contract for a certain period of time, so 
that the business managers would know what to depend 
on, much advantage would accrue to industry. The agrea- 
ment to settle everything by a joint arbitrating committee 
has worked well in several industries where it has been 
tried. If manufacturers and employers in general could 
count upon the stability of wages and the absence of strikes 
and other interferences of industry, production would be 
more regular and commodities could be placed on the 
market at a smaller cost. 



ECONOMICS. 129 

Effect of Political Organization on Values. 

The strength and stability of government has much to 
do with the stability of values, for the greater the security 
of property and labor, the fewer fluctuations of taxation 
brought about through extravagance or excessive demands, 
the more steady will values become. Every form of social 
organization has its influence on values. The government 
has not the power to create values nor to destroy them 
directly, but it may so cooperate with individuals as to 
regulate production. It may also by consumption increase 
the demand for a commodity and thus advance its price, 
or by a certain law increase or decrease the demand for 
it, — thus influencing the market. The action of the govern- 
ment frequently does materially affect markets. A good 
example of this is seen in the political uncertainty that 
occurs just before a presidential election in the United 
States: it influences business to such an extent as to 
cause stagnation in certain lines. The turmoils of some 
small nations frequently lead to a perpetual disturb- 
ance in business, rendering capital and all investments 
insecure. 

Increased Productivity on Account of Organization. 
Thorough economic and political organization will 
greatly enhance the productivity of wealth, while on the 
contrary poor organization leads to distrust and to expen- 
sive and slow production. The influence of the firm, the 
corporation, the trust, in the rapidity of production, is well 
known. The grouping of people in well-ordered homes, 
the creation of voluntary or involuntary groups wherein 
division of labor is practiced, enhances the power of pro- 
—9 



130 



ECONOMICS. 



diiction. By organized effort wealth is rapidly increased, 
because all of the forces of production are rendered highly 
efficient. 

References: Hadley, A. T., Economics j Ely, E. T., Labor 
Movement in America ; Gide, Charles, Principles of Political 
Economy ; Walker, F. A., Political Economy. 



PART II. 

DISTRIBUTION OF INCOME. 



CHAPTER I. 

PRINCIPLES OF DISTRIBUTION. 

Net Product. 

The net product of industry is that which remains after 
all expenses of production have been paid. By expenses of 
production is meant only the waste or use of capital, 
which must be replaced, and the income over and above 
this is called the net product. In considering a given 
manufacturing plant from the standpoint of the technology 
of wealth-getting, the net income would be that remain- 
ing after all expenses of rent, interest, wages and expenses 
of management have been paid. But it must be remem- 
bered that the net product considered here is the amount 
distributed among the different economic groups repre- 
sented, namely: landlords, capitalists, wage-earners, and 
managers ; or in other words, into different shares, such 
as rent, interest, wages, and j)rofits. The methods of dis- 
tributing the net product are worthy of consideration. 
First, distribution of wealth in this connection has ref- 
erence to ownership of property rather than exchange of 
place or location on the earth's surface. Into whose hands 

(131) 



132 ECONOMICS. 

does the net product of industry fall? In investigating 
the principles of distribution is is well to assume their 
operation under laws of free competition. We are not 
concerned at present with the actual conditions of an 
industry instituted for the purpose of making money, but 
rather with the general laws arising from economic pro- 
duction without interference with concrete conditions. 
Indeed, all economic law that may be demonstrated to 
be final and exact must operate under the conditions of 
free competition. Every discussion of the abstract prin- 
ciples of political economy recognizes this fact. Interfer- 
ences which may be caused by monopoly or by government 
are to be considered in a separate connection. 

Nature of Distribution. 
Mr. Mill held that production is natural and therefore 
its laws may be observed, but that distribution is artificial, 
consequently it is not possible to discover constant and 
certain laws. It is true that production is less interfered 
with by conscious human influences than distribution, the 
latter being disturbed in its natural course of free com- 
petition more readily than the former; but there is no 
reason for assuming that there are not natural processes 
in distribution as well as in production. The Socialists 
advance the idea that natural distribution, like natural 
production, is the only just method. The only difficulty 
in all this discussion is to understand what is meant by 
the term " natural." What the socialists consider natural 
distribution is finally settled when they discard the 
laissez-faire doctrine, or that of absolute freedom in com- 
petition, and insist that the state should regulate this 
just distribution, as it is the only body that has power 



ECONOMICS. 



133 



to attend to it justly. Henry George states also that the 
"just distribution of wealth is manifestly a natural distri- 
bution of wealth, and this is that which gives to him who 
makes it and secures to him who saves it." Here again 
is the question of the use of the term natural. It is 
evident that it is determined by purely a priori argument. 
It may be assumed that there are natural economic 
laws based upon the active conditions of economic society, 
but they do not assume a state of nature, for society is 
built up by a struggle against nature, or rather by the 
mastery of nature. In other words, the economic law of 
distribution does not in any way precede the construction 
of economic society, and what might be natural distribution 
under hand manufacture might be unnatural under power 
manufacture. Yet, in the consideration of the main facts 
of distribution, — that is, into whose hands the net product 
will fall under a state of free competition, — and in deter- 
mining upon what principles the net product of wealth 
passes into certain hands, we may appeal to general laws. 
Afterwards we may consider the exceptions to these laws 
and inquire into their various interferences, for it is evi- 
dent that these laws do not consider the necessities of 
man nor the justness of distribution. They only ask what 
happens, and why. 

Divisions of Net Product. 

The great problems of economic society have been stated 
as follows: first, how to create the largest aggregate of 
utilities, or of wealth ; second, how justly to divide this 
amount; and third, how to make the product minister to 
the permanent rather than to the transient well-being of 
society. These problems go beyond the bare expression of 



134 



ECONOMICS. 



economic law, and seek the ultimate of economic exist- 
ence. With society putting forth its unconscious effort 
to create economic goods, and each group seeking to ob- 
tain the largest return for time and service in the 
form of wealth, it is found that the net product falls 
regularly into four categories : rent, interest, wages, and 
profits ; to which is added sometimes, for the sake of con- 
venience, a fifth category, called "anomalous" fortune, 
which is only a term to represent the unclassified. But 
how are we to determine the amount which will pass into 
each separate category ? Is there a law which will deter- 
mine this ? It is easy to observe that the amount which 
goes to rent, interest, or wages, for instance, is quite a 
constant quantity. It is also conceded that the average 
profit from year to year remains about the same. But 
what determines the quantity which passes into each of the 
several categories ? The surplus which obtains on account 
of excessive fertility or favorable location of land is called 
rent. Bent is easily determined as the difference between 
the return upon that land which will just pay expenses 
of cultivation and the return from more fertile land. If 
this principle is extended to other industries, monopoly 
or proprietorship of fixed material or conditions, the rent 
principle appears. Wages are held to be the reward of 
labor, distinct from the earnings of capital or any other 
agency. The laborer receives wages for his toil. The 
manager of business receives profits as his reward for 
ability to organize and superintend business. The capi- 
talist receives interest on account of his ownership of 
capital, and on account of the increase of the net prod- 
uct due to the services of capital. The fifth category, 



ECONOMICS. 



135 



Avhich is sometimes used, that of anomalous fortune, would 
include all those material goods not included in the pre- 
ceding categories. The above statements represent the 
factors of the four categories of distribution. 

Undivided Net Product. 
It sometimes happens that a small proprietor who man- 
ages his own business receives the entire product, — rent, 
wages, interest, and profits. As for example, a small 
farmer w^ho owns his farm receives rent on account 
of fertility and location, wages on account of his own 
labor, interest on account of the capital he has invested, 
and profits on account of the skill in managing his affairs. 
Yet in economic analysis all of these divisions are clearly 
discerned, for rent arises out of land whether a man 
works his own land or that of another. 

Law of Equal Beturns. 

In determining these divisions of the net products there 
are certain laws which may be observed, although in prac- 
tice, owing to certain interferences, they show nothing 
more than tendencies. Indeed, a large number of economic 
laws when put to final test show nothing more than gen- 
eral tendencies ; yet these general tendencies are important 
for consideration. Let us suppose that we have free com- 
petition among all industrial people, and that w^e have 
likewise perfect mobility of capital and labor so that they 
will go wherever needed, and that there is sufficient land 
to be called into operation when it is needed. Add to 
these conditions one other, namely, that each knows what 
other business men are doing or about to do ; then we 
shall find that the last increment of capital or labor or 
skill will receive the same remuneration as the preceding 



136 



ECONOMICS. 



increment of each most recently employed in any way. 
That is, a dollar, or a day's labor, or a day's managing 
service, will yield in each case as much in one business 
as it would in another, and will be determined by the 
remuneration of services in the last investment. ]^ow 
this arises out of the fact that these various factors of 
production which are enumerated will seek the largest 
possible return of wealth for a given sacrifice. For it is 
easy to see that, under the conditions mentioned above, 
labor will tend to go where it will obtain the highest 
reward, and if perfectly mobile the equilibrium of demand 
and supply will be established and wages in the same em- 
ployment will be the same the world over. The same is 
true for capital For if men understand that other busi- 
nesses are more remunerative, and if capital moves freely, 
it will seek the highest rewards, but in its attempt to do 
this the equilibrium of supply and demand will again be 
established. 

JSTow it is well known that capital, labor and managing 
ability are not perfectly mobile, and it is also well known 
that each man does not know what all other business men 
are doing or are about to do. But there is a constant 
tendency to realize this principle; that is, there is a 
tendency in interest on capital to become the same no 
matter where it is invested, for wages to reap a certain 
average rate, and for rent to become more constant from 
year to year. The interference of monopoly and govern- 
ment destroys the mobility of capital and labor, and thus 
modifies the action of the laws of distribution in relation 
to them. Yet, upon the whole, equal returns to last in- 
vestments appear to be more and more constant. 



ECONOMICS. 137 

Dynataic Law of Distribution. 

It has already been stated that the divisions of the net 
product into wages, rent, profit, and interest, if taken 
at any given instant will represent a more or less constant 
return to each, but if industrial processes are set in motion 
the relations are liable to change from time to time. Thus, 
the amount of labor, land or capital in the market at any 
given time, varies, and hence yields a variable amount 
to wages, rent and interest, respectively. Considering 
productive enterprise in motion, land, labor, capital, and 
managing ability will tend to be remunerative inversely 
in proportion to their increase; that is, the one that has 
the smallest relative quantity in the market reaps the 
greatest reward at the expense of others. In other words, 
if labor and capital remain the same in quantity and a 
large amount of land be suddenly thrown upon the market, 
rent will have a tendency to be low while labor and capital 
are called into use, and will reap a relatively larger in- 
come in proportion to services. Or, if land and capital 
remain constant in quantity, and a large amount of labor 
be thrown suddenly upon the market, wages will tend to 
fall and rent and capital increase in proportion. Thus, 
if capital is doubling itself in forty years and labor in 
twenty, land remaining constant, wages will be lowered 
and interest raised. It is in this way that a sudden in- 
crease in the laboring population tends to lower wages, or 
the taking up of a large area of agricultural land sud- 
denly, lowers rent. 

Nevertheless, under normal conditions of industry the 
law of supply and demand is brought into operation and 
the equilibrium of distribution appears. Thus, if a largo 



138 ECONOMICS. 

amount of labor is tliroM^n into the market it seeks 
employment, and if capital is available it employs 
labor. If land is available it is also called into use, so that 
they stand relatively in the same position as before. This 
law manifests itself then largely in the irregularity of 
social development, which is soon overcome by the reestab- 
lishment of normal relations. 

How the Gross Product is Distributed. 

By gross product is meant the entire amount earned 
in a given industry, or, if considered in the concrete, 
of a given plant of said industry. It represents the entire 
earning capacity of an industry as evident from its annual 
output before expense of running or economic distribu- 
tion has taken place. 

In considering a specific business, the gross profits are 
divided into : replacement, which means the making good 
of the loss of capital which has been invested in any given 
business ; interest, which must be paid for the use of 
capital to the man who loans it; insurance or a certain 
sum set apart, taken from gross profits, to cover past or 
future losses, because the revenue varies from year to 
year. The wages of superintendence or management gen- 
erally appear in the forms of salary; and finally, the 
fifth element is called pure profit. This accrues to the 
manager on account of superior wisdom in the manage- 
ment of business. This represents the analysis of a single 
business from an economic standpoint. 

It is clear from the foregoing that the amount of profits 
which each factor receives is not immediately dependent 
upon the proportional amount each corresponding factor 
in production supplies in the process of creating wealth. 



ECONOMICS. 



139 



hence we must find some other determining cause. One 
school of economists has held that nature, labor and cap- 
ital are the three sources of value, and from each one 
there flows a stream of value coming from its respective 







Diagram / 


k. 






Proport 


lONAL, 


Dl 


VISION. 




Labor <:C 


o 









Q) -^ 

<r 


2^;;:>» Wages. 

;^;;:::>Rent. 


Capitol. ."CC^ 








■ '~~~~ 


^^]^;;:r> Interest. 


UanaOi'mq ^^-^ 
Ability. ''^^--. 


.^_ ai 








1—1 ^— ~^ 


;;;;:>> Profits. 



Diaqram C. 



Labor 




-g 



Capital. -" r 



lanoqmq S 
Ability o 



Wages 




Interest 



Profits 



Capital. 

Managing 
Ability. 



Diaqram B.; 

Value. 




Variable proportions 



of 



variable products. 




source ; that the amount and volume of this stream is 
dependent upon the power of land, labor and capital in 
production. (See diagram A.) It is held that there are 
three distinct streams flowing from source to mouth ; that 



140 



ECONOMICS. 



just the same amount of value as has flowed from each 
source passes into the income of the persons who own 
the soil, the capital, or furnish the labor; that the force 
of the stream of value is dependent immediately upon the 
force of the stream of productive power; and that each 
source thus represents a distinct productive power, with a 
distinct quantity of economic goods, each having definite 
value. This of course makes distribution a question of 
production, which is scarcely true. 

If we were to carry out the figure it might be said 
that the truth lies in the fact that the three separate 
streams of productive power when once entering into the 
process of production spread out again into distinct 
branches in their value-creating power. (See diagram B.) 
That is, the stream comes under the influences of the causes 
which create value, namely, the demand for goods, which 
includes the ability and the willingness of men to take 
economic goods at a certain market value. The value- 
creating power in production depends upon the intensity 
of men's needs and the quantity of means which they have 
for supplying these wants. That is, the amount of income 
flowing into these three separate categories will depend, 
not upon the several amounts of powers of production, but 
what has been separated out from the three streams in the 
figure by the value-creating power of man; that is, we 
refer it again to the law of supply and demand and market 
valuation. 

Another group of economists assume that labor is en- 
titled to the entire product because it is the source of 
value, and that labor would receive this product if it were 
not for a band of robber landlords, capitalists and managers 



ECONOMICS. 



141 



who suddenly appear to divide the returns of labor among 
themselves. This argument cannot be maintained, because 
labor is not the only cause of value ; nor would it be true 
that after rent and interest had been separated out, wages 
would take what was left^ — for indeed there is no residual 
claimant, either in rent, interest, or profits. (See dia- 
gram C.) 

The problem may be stated thus : Interest is a varying 
proportion of varying product of industry; wages repre- 
sent a variable proportion of a varying product of in- 
dustry ; rent is a varying proportion of a varying product 
of industry; and profits are a varying proportion of a 
varying product of industry. 

Let us refer once more to market values, and ascer- 
tain how they are created. In order to simplify matters, 
let us express the market value in terms of price, which 
is the money measure of exchange value. People do not 
exchange goods in a market without a probability of some 
advantage derived from exchange. The strength of the 
demand relative to the supply will fix the valuation of 
goods in a market. Let us take a very simple case, a case 
of a single transaction between two individuals. Suppose 
Mr. A desires to buy a horse, and puts the same estimate 
on the value of one hundred dollars that he does on the 
horse. It is evident that he will not pay more than one 
hundred dollars for a horse. His neighbor, Mr. B, has 
a horse which he values at forty dollars. It is evident 
that he will not sell his horse for less than this. There 
is a possibility that an exchange will take place here 
somewhere between forty and one hundred dollars. 
Should it take place at seventy dollars, each man will 



142 



ECONOMICS. 



have a gain of thirty dollars. That is, the price will lie 
somewhere between the maximum valuation placed upon 
the horse by the buyer and the minimum placed upon it by 
the seller. 

I^ow suppose instead of one man there are three bid- 
ding for the horse; suppose A, C, and D wish to buy the 
horse. A, as before, values the horse at one hundred 
dollars, C values it as equivalent to eighty dollars, while D 
considers the horse worth to him only sixty dollars. It is 
evident, although only one man can buy the horse, it is 
available to any one of the three. B still values his horse 
at forty dollars, and the others bid in competition for it. 
When they reach $60, D drops out; when they reach 
$80, C will drop out of the race, and A, who is willing to 
pay $100, will buy the horse at the lowest margin possible 
over what the next highest bidder offers, namely, $80. In 
this one-sided competition, which frequently occurs, the 
price is fixed somewhere between the valuation of the 
successful bidder and that of the highest unsuccessful 
bidder, with a tendency to approximate the latter. 

Suppose now we take the third case, where we have a 
number of buyers competing with a number of sellers 
for a given article, which is a true market. Suppose there 
is a case of six buyers competing for a barrel of apples, 
and five sellers, each wishing to sell one barrel. Let us 
say A will pay any price below $4.00 ; B any price below 
$3.50; C any price below $3.00; D any price below $2.50; 
E any price below $2.25; and F will pay any price below 
$2.00. Of those who have the apples for sale, suppose 
that X will accept for a barrel of apples any price above 
$1.00; seller Y any price above $1.50; seller Z any price 



ECONOMICS. 143 

above $2.00; seller W any price above $2.50; and seller 
S will accept any price above $3.00. It will be seen that 
at $1.00 there will be six buyers and one seller; at $1.50 
there will be six buyers and one seller; at $2.00 there 
will be five buyers and two sellers; at $2.50 there will be 
three sellers and three buyers ; at $3.00 two buyers and 
four sellers; while at $3.50 there would be five sellers and 
only one buyer. It will be seen, then, from this state- 
ment, that at $2.50 there will be as many buyers as sellers, 
and that this number represents a majority of the num- 
ber of sellers. At or near this point the market will be 
fixed, because outside buyers and sellers have not influence 
enough to modify prices. The price may be said to be 
fixed then somewhere between the actual valuation of the 
last buyer and the last seller, Kow it is evident from this 
that the entire product thrown upon the market must 
vary, not so much with the combined force of powers 
being used in production as the subjective value placed 
upon these products, which is dependent immediately 
upon the intensity of man's desires for the goods produced. 
If we turn our attention to the division of this varying 
quantity into wages, interest, rent, profits, etc., we must 
consider each specific case. 

If wages be considered, first, what is the wage-earner's 
share of this varying proportion ? It will be determined 
by the value-creating power as estimated by the market 
valuation of goods, which is determined by the law of 
supply and demand in combination with capital and land. 
If there is no limit to the supply of laborers, while the 
total amount of wages received may be greater than the 
total amount of capital in any given production, the former 



144 ECONOMICS. 

will be out of proportion to the total number of laborers 
employed, and the laborers themselves competing with each 
other for this total amount may reduce wages on account 
of the law of diminishing returns, down to the minimum 
of living. That is, the individual laborer must depend 
primarily upon the valuation placed upon the products of 
his labor in combination with other forces, and secondarily 
upon competition with his fellows for his share in the total 
product. Nevertheless, in normal conditions of business 
the rate of wages tends to remain somewhat constant, or 
to improve with improving business and decline with 
declining business. We can account for this in no other 
way than from the fact that the presence of a large number 
of able-bodied men seeking employment, other things 
being equal, will bring into operation a larger amount of 
available land and induce a larger amount of capital to 
seek investment, all of which will require a larger amount 
of managing ability. Therefore there is a tendency for 
not only the total amount of wages under normal condi- 
tions to remain about the same, but the rate of wages among 
laborers of the same grade to remain more or less constant. 
Especially is this true when we consider that of any staple 
commodity in the market, the market price, though not 
caused by the cost of production, has a tendency to approxi- 
mate to this finally.* 

Suppose now that the entire product in a given business 
be one thousand, and that ten units of laud yield eighty 
units of rent, ten units of capital yield one hundred sixty 
units of interest, ten units of organizing power yield one 
hundred sixty units of profits, and ten units of labor yield 
six hundred units of wages. It is evident that the average 

* Bee Thompson, Theory of Wages. 



ECONOMICS. 



145 



wages received bj one unit of labor would be sixty. If 
the population under normal conditions should steadily 
increase until it was doubled, we might assume that the 
product would be doubled and we should get two thousand 
instead of one thousand ; that twenty units of land would 
yield one hundred sixty units of interest; twenty units 
of capital, three hundred twenty units of interest ; twenty 
units of organizing power, three hundred twenty units of 
profits; while twenty units of labor would yield just 
double what they did before, or twelve hundred units of 
wages, the average wages for each normal unit remaining 
sixty, and so for each other factor in production. If, on 
the contrary, we should have a sudden influx of a lower 
grade of labor, the product would not be doubled under 
other similar conditions. Suppose now that the product 
amounts to only eighteen hundred instead of two thousand. 
In this case fifteen units of land would yield one hundred 
thirty-five units of rent ; fifteen units of capital would 
yield two hundred seventy units of interest ; fifteen units 
of organizing power two hundred seventy units of profits. 
The total to wages then would be the difference between the 
sum of these and eighteen hundred, or eleven hundred 
twenty-five. But the labor having been doubled, namely, 
twenty units, the yield here of wages is only fifty-six and 
one-fourth to each unit of labor. Wliile the entire amount 
of wages by the influx of cheap labor has been increased, 
the rate to each individual has been diminished. It might 
likewise be shown that land, capital, and organizing power 
receive a diminishing product per unit through the intro- 
duction of a large amount of unskilled labor. 

This harmonizes the two apparently opposing theories 
—10 



146 ECONOMICS. 

respecting wages, and makes them complements of each 
other. (1) That wages of all laborers in similar employ- 
ments are determined by what the laborer can produce 
who works on the margin of cultivation or the margin of 
utilization. Here the laborer receives as wages the total 
product, and if other laborers receive more than he, he 
would leave the margin to compete with them and the 
margin would rise. Hence the equalizing tendency of 
wages brings them all down to the marginal laborer who 
works upon the poorest opportunities. 

(2) The other view asserts that wages are determined by 
the standard of life of the laborer. The general rate of 
wages in any country, class or industry is the standard 
of living of the most expensive families furnishing a nec- 
essary part of the supply of labor in that country, class, 
or industry. The first is the objective law of wages, the 
second is the subjective. 

Both of these laws are subservient to the law of supply 
and demand, and the value-creating power of the pro- 
ductive process. The larger the supply, the lower will 
be the marginal product compared with the labor of pro- 
ducing it. Hence, whatever controls the supply of labor 
controls the marginal value of its product, which deter- 
mines the general rate of wages. 

It is held by some in this connection that the manager 
of business, the entrepreneur, is the residual claimant, 
and that the large products of industry are absorbed in 
profits. But it will be found under free competition that 
profits are governed as specifically^ by law as interest, rent, 
or wages. The gross j)rofits of any business are made up 
of what we term the replacement of capital, the insurance, 



ECONOMICS. 147 

interest, wages of superintendence, and what we may call 
pure profits. Pure profits are the only kind which should 
be classified along with pure wages, economic rent, or eco- 
nomic interest. Mr. Walker attempted to show that the 
profits received by different employers in the same enter- 
prise vary according to the law of rent, and that there 
are certain industries that, having paid interest, wages 
of superintendence, insurance, and replaced the prin- 
cipal, — the capital, — there was nothing left for the 
entrepreneur; and for this lowest class of industries 
there was a constant gradation to the highest, which paid 
a large return of net jDrofits on account of superior position 
or management. That there are certain industries that 
pay no net profits, every one knows ; that there are others 
in the same line that pay small net profits, is evident; 
while there are still others that pay a large return in 
profits. It is also evident that unless a manager of any 
business can pay the expenses of that business he will 
not continue in it, except it be through a short period of 
hard times in order to tide over business to better times, 
or to keep from losses. But under free competition the 
total amount of profits going to the entrepreneur or man- 
ager in any given line of industrial operation will depend 
again upon the demand and supply, or the subjective 
valuation of the goods produced, by the consumers of 
those goods; and, secondarily, upon the competition of 
the number of entrepreneurs or managers seeking invest- 
ment in any given line. But there are so many disturbing 
elements which modify profits that it has the appearance 
of being less steady than any other return in business. 
Thus, in ease of a drouth or a failure in business, wages, 
rent, or interest, is each steadier than profits. 



148 



ECONOMICS. 



Rights of Property. 
The theory of the rights of property is frequently dis- 
cussed by economists, and it has its place here in distri- 
bution, for it has a great influence in this part of economic 
life. Some economists have held that the right to hold 
property is based upon labor. According to their ideas, 
the man should be the owner of the things created by 
his own exertion. If this theory is put into practice it 
leads to absolute confusion, for when a man possesses a 
house, a forest, or a farm, it may not have been his own 
labor that created any one of these ; nor in the goods that 
fill a store do we find any evidence of the creative power 
of the owner. From a legal consideration the origin of 
the right of property is not discussed very fully. Lawyers 
have taken the right of property as a fact, and the rights 
of property are secured only through the power of the 
state. To define property by its attributes, accepting H 
as a fact, is the extent of the legal conception. Certain 
persons have advanced the theory of natural rights, hold- 
ing that property is merely an extension of human per- 
sonality over external nature. This is a very imperfect 
conception, for it leads to the assumption that all people 
are property-owners. The occupation theory ascribed 
property rights to the one who first obtained possession 
and whose property was finally recognized by his asso- 
ciates. Doubtless this is the atomic theory of the origin 
of property, though it has been much extended. The indi- 
vidual and collective ownership of property in the early 
period points to the idea of occupation as the first recog- 
nized title. It is evident that there is some truth in each 
one of these theories, but that the real test is in the prop- 



ECONOMICS. 149 

ertj rights as evidenced in the Roman law and tlie French 
civil code, and as such is recognized in all modern civil 
and common law. 

The rights of property have much to do with distribu- 
tion. Certain property is rapidly consumed and the in- 
fluence of ownership is very light; other property lasts 
a long time : indeed land itself lasts forever, which makes 
a vast difference in distribution. Other forms of wealth 
or property, such as government stocks or bonds, last as 
long as governments themselves. These highly perpetual 
classes of goods descend by will or inheritance from one 
person to another, and the distribution of wealth is thus 
very much affected. There are persons who are scarcely 
capable of earning a respectable living single-handed, yet 
they inherit fortune from a distant relative; the result 
is a distribution of wealth, and a net product of industry 
soon begins to flow through rent or interest. To avoid 
this principle of distribution by means of inheritance, the 
socialist sought to dispose entirely of inheritance ; that is, 
to abolish it. People who complain bitterly about inequali- 
ties of economic distribution are opposed to inheritance, 
for it tends to perpetuate and aggravate these inequalities. 

The exercise of the rights of property may be by a 
private person or individual, or, through the operation 
of the law, by a group of individuals in corporate capacity. 
The rights of property as exercised by corporations vary 
somewhat from the rights of property of individuals, for 
in all corporations we find that the majority rule; while 
the members associate themselves in a group under contract 
to carry out different kinds of work, they also agree to 
submit to whatever policy is adopted by the majority or 



160 



ECONOMICS, 



the policy of the states making the corporate laws. Also, 
the extension of powers granted these corporations by the 
states gives them superior rights, such as the right of 
eminent domain and the income arising therefrom. The 
ownership of public property is manifest through what 
are known as political corporations, the general policy 
of the state being to manage the property for the people 
at large. Here then we have a variety of ownership 
which has grown up through custom, and its authority 
and right need not be questioned. The only facts to be 
observed are, as to whether there is a definite description 
of the property, and whether a legal title can be shown to 
give to it all the rights and privileges of property. The 
right of property cannot be rationally questioned, although 
many people who attempt to carry out their socialistic 
theory and deny the right of interest in order to maintain 
their position are forced to deny the right of property 
in their attempt to defend their absurd position. 

Monopoly Privileges. 

There are however certain monopoly privileges granted 
by the state, which also interfere very much with the 
distribution of wealth. These are generally in the form 
of patent rights, copyrights, trade-marks, and franchises. 
They are sometimes called artificial monopolies, because 
they are created by the state. They are not a source of 
wealth or a means of production, but merely an exclusive 
control given by the government over a certain enterprise, 
the entire profits of which may be directed into the hands 
of one who owns the right or privilege. But as these 
may be bought and sold, from the personal standpoint of 
the distribution of wealth they are property rights. 



ECONOMICS. 



161 



There is another group of monopolies, that arise out 
of the condition of modern industrial society. These are 
sometimes called natural monopolies, because the monopoly 
power arises out of economic conditions; although the 
line of division is not strongly marked between them and 
artificial monopolies, for indeed every natural monopoly 
receives the sanction of the government by the means of 
a franchise which makes it rely in part upon the state 
for its existence. Land, in so far as it is a monopoly, 
belongs to this class, and such great enterprises as raib 
ways, water-works, tramways, gas-works, telegraphs, etc., 
are classified in this group. Also, the modern manufac- 
turing industries which have grown into gigantic corpora- 
tions and trusts have derived such a momentum of power 
and mastery over conditions as to be practically monopo- 
lies. Summing up a review of natural and artificial 
monopolies, Mr. J. R. Commons, in his book on The Dis- 
tribution of Wealth, enumerates the following proposi- 
tions : 

1. They are not capital, but exclusive privileges of sell- 
ing goods and services. This privilege is of paramount 
importance in modern society, where goods are produced, 
not for direct consumption by the producers, but for sale 
and profit. 

2. They fuitiish opportunities for the profitable in- 
vestment of labor and capital. 

3. Their value consists in the power they give to limit 
the supply of their produce relatively to the demand 
for it. 

4. They may be united in more or less complicated 
combinations in single enterprises. A railway, for ex- 
ample, may possess monopoly advantages due to patents, 
franchises, land, and good-will. 



162 



ECONOMICS. 



5. They are, like capital, the objects of the rights of 
property, and may therefore be subject to full and partial 
ownership. In the case of artificial monopolies, the gov- 
ernment creates the monopoly privilege, and then assigns 
it to individuals, who maj^ transfer it by deed or other- 
wise. But in the case of natural monopolies, the monopoly 
privilege arises simply by virtue of private property in 
a certain peculiar kind of material object. 

6. Good-will is partly a natural and partly an artificial 
monopoly. It originates in the fact of private property 
in material objects, such as a retail store or manufacturing 
enterprise. In order that this may be done, the law must 
make it an artificial monopoly. It does this, not by form- 
ally creating a monopoly privilege, but by enforcing the 
private contract of the seller not to engage in the same 
occupation, according to the terms of the contract. 

7. The public, as well as individuals, may be the owner 
of land, capital, and monopoly privileges. The state, in 
its various divisions, is a legal person, and as such is a 
subject of the same rights as private persons. This in- 
cludes full ownership, which may be the ownership simply 
of material objects, as a postofSce building ; or the owner- 
ship of natural or legal monopoly, such as water-works, 
streets, and the postoffice business ; i. e., the exclusive right 
to supply water, maintain streets, and carry the mails. 

References: Commons, J. R., The Distribution of Wealth; 
Thompson, H. M., The Theory of Wages; Nicholson, J. S., The 
Principles of Political Economy; Hadley, A. T., Economics; 
Marshall, Alfred, Principles of Political Economy ; Hobson, John A., 
The Economics of Distribution; Clark, J. B., The Distribution of 
Wealth; Carver, T. N., The Distribution of Wealth. 



ECONOMICS. 



153 



CHAPTER II. 

RENT AS A FACTOR IN DISTRIBUTION. 

Bent in General. 

Rent is called the normal return of land. Ricardo 
asserted that it arose from the natural and indestructible 
qualities of the soil; and this definition is quite correct 
fundamentalljj for rent arises from the use of the ground 
alone. As Ely says, " The rent of land is the annual re- 
turn of land itself " ; or, as Walker says, " Rent is the 
surplus of the crop above the cost of cultivation on the 
least productive lands contributing to the supply of the 
market." Marshall says : " The rent of a piece of land is 
the excess of its produce over the produce of an adjacent 
piece of land which is cultivated with an equal amount 
of capital, and which would not be cultivated at all if 
rent were demanded for it." And Marshall continues to 
say that "the economic rent of a piece of land is found by 
subtracting from the value of the annual produce an 
amount sufiicient to return the former outlay with profits." 
These are only different methods of expressing the nature 
of rent. Andrews extends the principle of rent to general 
monopoly, and says : " Rent in its broadest sense is any 
kind of gain arising from monopoly, whether in land, 
capital, or talent-income, which falls to any productive 
agency simply because of its rarity." 

Contract Bent and Economic Bent. 

It is necessary to distinguish between ordinary con- 
tract or market rent and economic rent. A person enters 



154 ECONOMICS. 

into a contract to jiaj the owner of land a certain fixed 
annual sum for the use of the land. For this sum the 
tenant has the use of the land, buildings, ground on which 
thej stand, and all improvements. The sum which he 
pays is composed of two chief elements, — one the payment 
for the use of capital invested in improvements, and the 
other for the use of land itself. A piece of imimproved 
property adjoining, of the same grade as the improved 
land, rents for much less, which is probably the normal 
rent. However, it may be possible that in making the 
contract, — on account of ignorance, or a sudden excessive 
demand for land, or the pressure of custom in charging 
high rents, — the individual may have paid too much, or 
more than the real rent of the land alone, known as eco- 
nomic rent in the principal works of political economy. 
A very good illustration of this economic rent is seen 
in cities such as Baltimore and Philadelphia, where the 
rent of the land is different from the rent of the house 
•which stands on it. A person may own the house but not 
own the land, and thus pay rent for the land on which 
his house stands, — ^which would be considered as economic 

rent. 

Cause of Bent. 

Rent arises from two fundamental conditions of land: 
first, that of fertility; and second, that of position or 
location. These two usually work in conjunction, and the 
difference of position more frequently than the difference 
of fertility represents the chief factor in determining 
rent in towns and cities; while in rural districts fertility 
of soil is a more important factor.* Lands that are favor- 
ably located yield a larger return than those less favor- 

* In case of ground rents of town lots fertility does not enter into the cause of rent, 
it being determined by position alone. 



ECONOMICS. 



165 



ably situated, and lands having a fertile soil which yields 
a large product, yield a higher rent than poorer land. 
As the first use of the soil is tillage, it would appear 
that the difference in fertility would be the first causa; 
but as location respecting the market lessens cost of trans- 
portation, the position of farm lands has much to do 
with their market rent. In determining rent. Walker 
insists on the consideration of fertility as the real cause 

of rent. 

Manner in which Bent Arises. 

Suppose there are several tracts of land in the same 
market, and that there is private ownership of land and 
competition in its use. Eliminate all personal influences 
save the desire to obtain the largest return for a given 
sacrifice of capital and labor on the part of both landlord 
and tenant. Of the tracts of land A, B, C, and D, which 
are enumerated in the order of their fertility, D yields 
just enough product to pay for the cost of cultivation; 
that is, the wages of labor, interest on capital invested, 
and remuneration for managing ability. Let us fix this 
yield at ten bushels per acre. It costs no more to cultivate 
the tract C of more fertile soil than the tract D, hence 
the expenses per acre will be the same. Suppose now 
that C yields fifteen bushels per acre, it is evident that 
the five bushels represent a clear gain on account of extra 
fertility. So, if B yields twenty and A twenty-five, it is 
evident that the rent is respectively ten and fifteen bushels 
per acre. Should the prices of products rise so as to 
make an increased demand, then other and less fertile 
lands than D may be brought into use to supply the 
market, and rent will appear in the tract D, for it will 



166 



ECONOMICS. 



take fewer bushels to pay the cost of cultivation. On the 
contrary, if prices should fall to any great extent, C will 
no longer pay rent, but go out of cultivation unless it can 
be used for some other purpose to sufficient advantage to 
pay rent or cost of service. (See diagram H, fig. 1.) 

DIAGRAM H. 



Figure 1. 



25 bu. 


20 bu. 


15 bu. 


10 bu. 


A 


B 





D 


Rent, 15 bu. 


Rent, 10 bu. 


Rent, 5 bu. 





Figure 2. 




Figure 3. 



ECONOMICS. 



167 



Should there be discovered a large tract of fertile land 
E, which would yield a return equal to C, D would go 
out of cultivation if the fertile tracts could supply the 
markets, otherwise D would be worked at cost. The open- 
ing up of the fertile lands of the Mississippi valley and 
the far West caused less fertile lands in New England 
to go out of cultivation, or to be used for pasturage, in 
which they paid expenses or else yielded a small rent. 
(See diagram H, fig. 2.) 

Difference in the Fertility of Soil. 

As rent rises chiefly from the difference of the fertility 
of soil, it is evident wherever land is in cultivation. 
Thus, suppose a farmer has a tract of four hundred acres 
of land which is divided into four different tracts of an 
equal fertility. The most fertile lands are cultivated 
first. If the returns from agriculture are sufficient, the 
lands in the second grade of fertility will be cultivated; 
and if prices continue to rise, the farmer may continue 
to increase the area of cultivation until the entire tract is 
cultivated. Here, as above, rent rises in the first instance 
out of the differences of fertility of the land. 

Favorable Location. 

But if land were all of the same degree of fertility, its 
difference in location would have a tendency to develop 
rent. Now it is impossible to equalize the location of 
land, whether it be agricultural land or city property, 
for the desirability of location will always be observed, 
even in the taking up of new lands in a large valley. 
Usually, the first located has a value superior to the 
second, not only on account of fertility, but also of loca- 



168 



ECONOMICS. 



tion. The ground rent whicli arises in cities is entirely 
dependent upon location. On some streets we find rent 
reaching fabulous prices, while on others it is much lower. 
The farther business property is from the busy center 
of the city, the cheaper the rent, unless it should be taken 
from valuable residence property ; and residence property 
varies in value likewise as it recedes from the desirable 
and fashionable residence localities. 

Limited Returns to Agriculture. 

Intensive agriculture tends to retard the process of tak- 
ing up new lands, and were it not for the fact that land 
has not only decreasing but limited returns, a small area 
would tend to supply all the demand for agricultural prod- 
ucts ; but there is a limit to which agriculture can be suc- 
cessfully continued on any tract of land. Indeed, there 
is a point to be reached when the application of labor and 
capital will yield no return whatever. The tendency to 
take up new lands does not always proceed with regularity. 
In the first place, lands are not taken up always on account 
of their immediate economic yield, but rather are secured 
as an investment. Men enter a new territory far from 
the market and take up lands which would not yield any 
rent at all or even pay for the cultivation, obtaining only 
a bare subsistence while cultivation is carried on, with 
a prospect in the rise of the price of land somewhat later. 
This is purely a business investment, and nearly all the 
lands of the West have been secured in this way. It is 
also true that when people have once established them- 
selves on lands they do not abandon them for more fertile 
lands, because they have invested capital in improvements 
and they hold these lands even after they pay no rent. 



ECONOMICS. ISy 

Margin of Cultivation. 

That land which will just pay the cost of ciiltivatioTi 
and no more is said to be on the margin of cultivation. 
(See diagram H.) Lands that are less fertile or less 
favorably situated are said to be below the margin of culti- 
vation, and will not be occupied. That is, land that will 
pay wages for cultivation, profits for management and in- 
terest on capital invested will be occupied and cultivated, 
while land that fails to yield this return will not be cul- 
tivated. It sometimes happens, however, that land which 
will not be used for agricultural purposes may be used 
for other purposes and thus yield a rent, or at least pay 
for the cost of cultivation. It also happens that land is 
occupied and cultivated by persons who spend partial time 
upon it, using the remainder for some other purpose. In 
such cases, land that would pay no rent for agriculture 
might yield a return for pasturage. 

Prices and Bent. 

An increase in prices, if permanent and constant, will 
tend to enlarge the agricultural area ; and this has a tend- 
ency to increase rent, for, as it costs the same to cultivate 
an acre of poor land as that of rich land, the lower the 
margin of cultivation falls, the higher will be the rent, 
because the annual return on the fertile lands is much 
increased, and the difference in the cost of cultivating 
the poorest land occupied and the returns of the most 
fertile, is greatly increased. Consequently, high prices 
as well as favorable location increase rent, simply because 
high prices create a demand for land. The opposite is 
true in the case of fall of prices. A long, persistent fall 
in prices will tend to diminish the demand for land, 



160 



ECONOMICS. 



which will cause its rent to fall. This must be taken 
as a general law which is interfered with by various 
conditions of investment, for land will be held for year 
after year when local interferences cause it to yield no 
rent or indeed to fall below the margin of cultivation, 
simply on account of a prospective yield. In this way busi- 
ness is tided over in difficult times until it pays. This, 
however, does not interfere with the law of rent, for in- 
deed wore there no margin of cultivation except in theory, 
the fact of the relative fertility of land and the difference 
in the desirability of location would be sufficient to es- 
tablish the law of rent. 

Bent Does Not Enter into the Cost of Production. 

It is assumed that the market price of an article is 
not dependent upon the rent that .is paid, but rather 
that rent is determined by the market price. This is 
logically the correct view to take. High rents do not 
give us high prices, but high prices make high rents. It 
might be well to inquire carefully into the real nature 
of this statement, to see what is meant. When Mr. 
Kicardo enunciated this doctrine he talked about corn, 
as if all kinds of produce whatsoever had been reduced 
to one kind. If this could be true it would be actually 
certain that high prices would give us high rent univer- 
sally, and that high rents have nothing to do with high 
prices. However, there is an indirect way in which high 
rents may make high prices. Suppose there be a given 
number of acres of wheat land and a given number of 
acres of corn land. If the price of wheat should rise 
until the wheat land was not sufficient to supply the de- 
mands, they might encroach upon the corn lands and thus 



ECONOMICS. 161 

create a deficiency in the corn crop, — for wheat would 
raise the price of corn. That is, the high rent of land for 
wheat might cause high prices for corn. To find out just 
what is meant by this in a practical sense, let us take the 
case of the mineral springs. (See Marshall's Principles 
of Economics, Bk. VI, ch. 2.) Let us suppose of a series 
of mineral springs that they are all owned by different 
individuals; that they furnish a natural mineral water 
which finds a market, and for which there is no available 
substitute. There is a free competition in both buying 
and selling. Suppose that the supply that is drawn from 
each of them can be increased indefinitely by pumping^ 
but that the expense of this increases in proportion to 
the additional supplies to be obtained by this process. 
The owner of each spring will go on increasing his produc- 
tion until the price of water no longer covers more than 
the expense of an additional supply. That is, the last 
gallon of water which the expenditure enables him to 
raise when the amount raised by the whole number of 
springs is just sufiicient to meet the market, will be pro- 
duced at an equilibrium price which will just pay for 
its own production. The rental value of each spring now 
will be the excess which this price affords over the expenses 
of working it. That is, demand and supply here as before 
regulate the price, but will not enter into the expenses r>f 
production. But suppose, now, that the land occupied 
by one of these springs is more desirable for a building 
site, and some person should build upon it and thus de- 
crease the supply of water. Immediately, as the water- 
supply is contracted, the demand for the water is relatively 

greater than the supply, and the price rises. Consequently 
—11 



162 



ECONOMICS. 



the high rent of the ground used for some other purpose 
increases the price of the commodity in the market. With 
reference to agricultural products taken as a whole, the 
law that rent does not enter into the cost of production 
obtains. But, if there be a certain amount of land which 
can be used for the purpose of raising wheat and a certain 
amount that can be used for corn, suppose an increased 
demand for corn should raise the price of that commoditj 
so that it would encroach upon the wheat land, taking 
a part of it; immediately now, supposing the demand for 
wheat be constant, the demand will be greater than the 
supply, and the price will rise on account of the excessive 
rent arising from the corn land, which has therefore en- 
croached upon the whoat land. 

Bent and Free Land. 
The principles of rent as enunciated above represent 
the result of free land. So long as there are lands to be 
taken up, the principle of rent is easily determined. There 
must be a time, however, when all of the free land will 
be taken which, under any ordinary circumstances, can 
be used at all. As the margin of cultivation falls under 
free lands, rent absorbs more and more of the entire 
product; and as the rent increases, the margin of free 
productivity continues to decrease, because lands of lower 
grade can be used. When landlordism prevails and the 
owner of the land fails to cultivate, but lets it out to ten- 
ants, the land will yield no rent in the lowest scale of pro- 
duction. There is a continual absorption of the entire 
product until rent meets Avages, and then there is a check. 
The rent of land arises whether land is free or unfree; 
there is no difference in this respect so far as the principle 
of rent is concerned. 



ECONOMICS. 



163 



Economic Significance of Bent. 
Rent must always be allowed for in any financial calcu- 
lation whatever. The constant increase in rent in propor- 
tion to the returns from agriculture has alarmed some 
people, who seem to believe that rent eventually will ab- 
sorb the entire product. Fortunately, in our own country 
sixty-five per cent, of the farms are still owned by those 
who work them, and whatever increment of rent arises 
goes to the owner. 

References: Walker, F. A., Land and Its Eent; Clark, J. B., 
Capital and Its Earnings; Commons, J. R., The Distribution of 
Wealth ; Ricardo, D., Principles of Political Economy ; Patten, 
Simon N,, The Premises of Political Economy. 



164 ECONOMICS. 



CHAPTER III. 

WAGES AS A FACTOR IN DISTRIBUTION. 

Labor the Cause of Wages. 

When we speak of wages in the scientific sense, we 
mean the earnings of common labor; all high fees and 
salaries should be excluded. The rewards earned by 
peculiar talents, education, or training, are sometimes 
classified along with profits. However, the line must not 
be drawn too closely when we consider the general subject 
of wages, for in a general sense it is payment for services 
rendered. The salary of a railroad president at $25,000 
a year is a return for services. But the wages question 
scientifically considered should not include such a salary 
as wages. But labor is the cause of wages. The payment 
for the services rendered by the combined action of body 
and brains is wages. They are earned by the laborer. 
He earns his own wages each day he labors, and when he 
ceases to do this he is not employed. Hence it is some- 
times said that the laborer pays his own wages. 

Pure Wages Distinguished from Gross Wages. 
The return to common labor is called pure wages, which 
should be distinguished from gross wages, which might 
include extra rewards and services. 

Real and Nominal Wages. 

Economic wages are real wages, not nominal. By real 
wages is meant the purchasing power of a day's labor; 
by nominal wages the amount received in currency. 



ECONOMICS. 



166 



A man may be receiving two dollars a day in one country 
and for the same service a man receives one dollar in 
another, yet they may have the same real wages; for it 
is possible that the man who receives a dollar a day buys 
the same articles for a dollar that would cost the other 
man two dollars. The real wages in different countries 
do not vary so much as the nominal wages, hence people 
in making comparisons of wages frequently omit to prop- 
erly distinguish between real and nominal wages. 

Wage-Fund Theory. 
Some of the older economists held that there was a 
certain sum, a part of capital, set aside for the payment 
of wages, and when this sum was exhausted no more 
laborers could be hired until it was replaced. This wage 
fund was continually growing as economic society and 
wealth accumulated, and the number of laborers that 
might be employed was limited by this fund. Accepting 
this theory, it was an easy manner to determine the rate 
of wages by simply dividing the amount of the wage fund 
by the number of laborers. This method would set a limit 
upon the rate of wages to be paid. Mr. Mill advocated 
this doctrine in his earlier years, but abandoned it some- 
what later. The fact is that the source of wages is the 
earnings of the wage-earner, and the wages come out of 
the product which he makes every day. Instead of giv- 
ing him his share of the product at night or at the close 
of the week, the employer advances in the form of money 
the laborer's wages each day or each week. Of course in the 
wages system the rate is determined by the employer and 
laborer by contract before the labor begins. But when the 
laborer's earnings will no longer pay for his wages he 



166 ECONOMICS. 

will cease to be employed. There is a point at which 
the wage-fund theory and the labor theory practically 
coincide, for wages are limited by capital. The amount 
of capital seeking investment by way of buildings, machin- 
ery, etc., determines the number of laborers to be em- 
ployed, and hence fixes the rate of wages. If capital is 
not available, laborers will not be employed. On the othcn- 
hand, if laborers are thrown on the market they will tend 
to decrease wages by competition, and the capital under 
such circumstances indirectly determines the rate. Now 
the wage-fund theory supposes that a certain sum is set 
apart for the payment of wages, and that no more laborers 
can be employed until this is replaced. If we consider 
this replacement working at a rapid rate, it simply asserts 
that capital limits wages. HoAvever, there is a wide dis- 
tinction in theory, for in the economic sense wages must 
come out of the earnings of labor instead of being paid 
out of the surplus of capital, which is used for other 
purposes. The point of view is entirely different, and 
the different results are of great importance in the theory 

of wages. 

Determination of the Rate of Wages. 

There are various theories of wages. Some workmen 
and certain philosophers are always demanding the whole 
of the product for the laborer. They hold that the men 
who create the goods have the use of them. They imagine 
that gains are obtained by capital in an unjust way^ 
but are in error because they fail to recognize that capital 
performs any service whatever. Those laborers who at- 
tempt to break down the wage system by methods of 
cooperation are the first to learn that capital is necessary 
to carry on any business whatever. Generally speaking, 



ECONOMICS. 



167 



the rate of wages is determined by supply and demand. 
The more laborers in the market, the demand remaining 
the same, the lower will wages be. This is the general 
theory underlying the whole system of wages, although 
it is true that wages may be reduced to a more specific 
theory, which will be determined hereafter. 

Residual- Claimant Theory. 
One of the commonest theories for determining the 
rate of wages is generally known as the residual- 
claimant theory. It has been advocated by Professor 
Walker and other able economists. It holds that the net 
product of industry divides itself into rent, profits, wages, 
and interest. That when rent, profits and interest are 
satisfied, wages take what is left. When asked if this 
is true why the amount of wages is so small, it is replied 
that by some power of capital or managing ability a large 
proportion of income has been directed away from its 
natural source which would otherwise have fallen naturally 
to labor. In reality there is no residual claimant in distri- 
bution. Wages are a variable proportion of a variable 
product, and so for rent and interest, — both being variable 
proportions of variable products. While the net product is 
distributed between rent, wages, interest, and profits, the 
proportion upon which it is divided does not depend upon 
the residual-claimant theory, but rather upon the value- 
creating power of each factor in production, and this 
throws it all in the province of supply and demand. 

Iron Law of Wages. 
In attempting to ascertain whether there is a natural 
law of wages, Turgot announced that "in every kind of 
labor the workman's wages must fall to a level solely de- 



168 ECONOMICS. 

termined by the necessities of existence." J. B. Say and 
Kicardo somewhat later used almost the same words ; and 
the socialists, taking up the idea, expanded and empha- 
sized it. This is what is known as the iron law of wages, 
or, as it is sometimes called, the brass law. It means 
that wages must be regulated by the value that is abso- 
lutely necessary for the support of the laborer and his 
family. There must be sufficient to give food, shelter, 
and protection; to keep up repairs, so to speak; and to 
replace the laborer with another when he wears out. This 
means that the Chinaman living upon rice and with small 
amount of clothing and little protection receives wages 
accordingly, and that the American laborer who reduces 
his style of life to the same condition must likewise live 
upon a few cents a day. The law as a law is not true, 
though it does show a tendency in determining the rate 
of wages. If we take it that the workman's wages will 
never rise above what he absolutely requires to live upon, 
the facts in the case overthrow it. For different kinds of 
work receive different wages ; also, different wages for the 
same work are paid in different countries. But, says one, 
this rate of living is taken according to the standard of 
life that it is necessary for him to maintain. If this be 
true, then the law of wages is not such a terrible thing 
as it appears to be. If it means that laborers are gTound 
down to the bare necessaries of human existence, and 
that the normal rate of wages is just sufficient to 
sustain life and reproduce their kind under the most 
favorable circumstance, the law is not true. But in a 
broad sense the theory is more or less true, for wages 
must sustain life or work ceases. On the other hand, 
there is a point beyond Avhich wages cannot rise without 



ECONOMICS. 169 

discouraging business operations. Between these two 
points, the upper and the lower, are developed the real 
scientific laws of wages. 

Scientific Law of Wages. 

If we consider the various industries in every line of 
work, it will be seen that the natural or normal rate of 
wages is determined by the lowest grade of industry in 
any given line. As it has been stated, "general wages 
tend to equal the last actual product by the last laborer 
that is added to the social working force." This is es- 
tablished on the principle that when labor will pay for 
itself, it will be employed; if not, no labor will be em- 
ployed. In this respect it has a resemblance to the law 
of rent and profits. It would not be proper to insist 
that the normal rate of wages is caused by this business 
on the margin of profits, but that the natural or normal 
rate of wages is indicated at this point. It is merely a 
process of excluding more complex elements and return- 
ing to the simplest phase of industry in order to allow 
wages to stand alone. If this indicates the normal rate 
of wages, other more prosperous industries, or those de- 
manding greater skill, might return a larger amount in 
the form of wages. The normal rate of wages could be 
determined in no other way, although competition in 
the labor market brings wages to a general level in dif- 
ferent groups. 

Competing Groups. 

There are everywhere low-pressure and high-pressure 
competitive groups of labor. Thus, in the iron industry 
we find competition of groups of miners, smelters, pud- 
dlers, etc. In the machine-shop there are competitive 



ITO - ECONOMICS. 

groups of men in specialized occupations. So in the 
woolen industry, — the general competition of all laborers 
employed and a special competition among those especially 
prepared for a given service. Also, it appears that in 
the division of labor originally, these groups were formed 
because each laborer had a special occupation. As the 
division of labor becomes excessive, we find the tendency 
for labor to become more mobile. That is, as it takes, 
but little time for a person to learn one thing, he may 
pass more readily from one industry to another; thus 
the barriers between industries appear to be broken down : 
yet there are other things that interfere with the mobility 
of labor. The specialization, requiring greater skill before 
confidence is established, and also the fact that through 
labor unions and methods of business, employers are not 
willing to take up with persons who have left one industry 
to enter another, make it quite difficult to render labor 
mobile. Should a scarcity of labor appear, then it would 
be easier for labor to shift from one occupation to another. 
The result of competition in the high-pressure group is 
to turn the surplus labor of some groups into others, and 
to turn the surplus of all groups into the unskilled labor 
group, which makes up the rank and file of the unemployed. 
Wages thus are subject to a general law of competition 
of all laborers, and a special law of special groups. 

Influence of Labor Organizations on Wages. 

The influence of labor organizations on wages is a dis- 
puted point among economic writers. That labor organiza- 
tions have had at least a general influence on wages, cannot 
be denied. In so far as they have been successful in limit- 
ing the supply of labor in a given field, they have sue- 



ECONOMICS. 



171 



ceeded in raising the rate of wages. In so far as they 
have created monopoly of labor, they have developed a 
monopoly of wages. Yet it will be found that their 
greatest influence has been in agitation, in creating a 
demand for higher wages, and in strikes which have 
resulted in forcing employers to pay a fair rate or what 
the business would allow. While fundamentally the great 
law of supply and demand must regulate general wages, 
it cannot be denied that the influence of labor organiza- 
tions has done considerable in keeping up the rate of 
wages. Yet it must be conceded while they have advanced 
wages, they have contributed somewhat to the army of 
the unemployed by making it unprofitable to carry on 
certain industries at the high wages demanded. Their 
influence on wages from the direct standpoint of monopoly 
has been of a somewhat temporary nature; while their 
influence by creating a higher standard of life and by 
educating public sentiment through agitation and strikes 
has tended to hold up wages. 

Business Sense and Wages. 
An important cause of the increase in wages has been 
the business sense of employers. For instance, in the 
care of horses two theories have been advocated, viz. : 
that to work a horse very hard and get all you can out 
of him in a short time is economy; to feed him well, 
care for him properly and make him last longer is best 
economy. The same theories were advocated in regard to 
slave labor. If horses, mules and slaves yield a larger 
return by excessive toil, which shortens life and gradually 
lessens labor-power, it is not so true of labor. A laborer 
well fed and well cared for will do more work and better 



172 ECONOMICS. 

work for the employer than one who is poorly fed and 
poorly cared for. Hence it is best for the employer to 
look after the welfare of his laborers, and it is not best 
for the employer to have a grinding rate of wages for the 
laborer. Many men have seen this, and have advanced 
their own interest by taking good care of the laborers, 
making them capable of earning a high rate of wages, 
keeping them contented and happy, so that they are will- 
ing to earn the wages and to interest themselves in their 
employer's work; and finally, by paying a high rate of 
wages. Thus we find that business sense has been looking 
out for the laborer, and has tended to keep up wholesome 
sentiment in favor of higher wages. 

Philanthropy and Wages. 

Sentiment has much to do with economic relations, and 
a well-administered philanthropy has a tendency to create 
an interest in the laboring population and promote ad- 
vocacy of higher wages. Yet it will be found that all 
permanent movements in this respect are based upon busi- 
ness relations and rest upon a business basis. The agitation 
for higher wages in behalf of labor, although resting on an 
economic basis, has its influence in raising wages. 

Eight-Hour Day and Its Effect on Wages. 

It is thought by many laborers that if the eight-hour 
day should obtain, wages would remain the same for 
shorter hours. Others hold that it would give means for 
employment to a large number of laborers. In fact, the 
eight-hour day in some industries would earn as high wages 
as the ten, while in others it would fall much short. The 
decrease in the number of hours of labor in general would 
yield a relatively large return of wages per hour and a 



ECOXOMTCS. 



173 



smaller return per day. Possibly with the general adjust- 
ments of industry, wages would remain the same for an 
eight-hour day as for a ten. Wherever the day has 
been shortened to labor the appalling effects which are 
generally pointed out in prospect have never appeared. 
The increase in wages has kept its pace notwithstanding 
the decrease in hours. 

Gradual Increase in Wages. 

One of the most striking phases of modern economic life 
is the constant increase in wages. This of course has 
varied on account of local disturbances and periods of 
depression, while as a rule there has been a persistent 
rise. In looking over the advance in wages in the United 
States during the past fifty years, it will be found that 
the rate of wages was very low when we had a high infla- 
tion of currency. This was caused by the difference be- 
tween nominal and real wages. It is an illustration of 
the principle that in all movements of money involving 
the rise or fall of prices, wages are the first to be affected 
in the fall and the last to be affected in the rise. There- 
fore a sudden and radical change in the currency has 
a significant effect on the rate of wages. 

Improvement of Wages by Legfislation. 
It used to be customary in England for the justice of 
the peace to regulate wages for a given period. Indeed, 
it was a strong theory in the early modern period that 
fair wages should be established by law rather than to 
be trusted to competition and demand. But this custom, 
which was arbitrary and useless, finally gave way to free 
competition, until in modern times no attempt has been 
made to regulate wages in industry by legislation. Yet 



174 



ECONOMICS. 



the protective power of legislation in creating better san- 
itary condition, in insisting tliat the laborer has a right 
in the product, and in gTiaranteeing his wages, has had 
much to do with promoting the rights of the laborer, and 
this has an indirect influence on wages. This is the only 
real benefit that legislation can have to advance the rate 
of wages. 

Economic Signification of Wages. 

The discussion of wages belongs to economic distribu- 
tion. It is very important in the general economic effect 
of society. Well-paid laborers are great consumers, and 
consumption creates a demand for goods. A body of well- 
fed, well-paid laborers is in a measure a test of the pros- 
perity of a country, and to a certain extent the index of 
its civilization. This latter is especially true if the labor- 
ers are honest, reliable, and of good physical and moral 
health. 

References: Clark, J. B., Possibility of a Scientific Law of 
Wages; Wood, Stuart, Theory of Wages; Thompson, H. M., 
Theory of Wages ; Mill, John Stuart, Principles of Political Econ- 
omy ; Walker, F. A., Principles of Political Economy; Taussig, 
F. W., Wages and Capital ; Ashley, W. J., The Adjustment of Wages. 



ECONOMICS. 



176 



CHAPTER IV. 

INTEREST AS A FACTOR IN DISTRIBUTION. 

Nature of Interest. 

Income that comes to capital is called interest. It is 
sometimes used to designate the entire yield of capital 
before current expenses, risks and repairs are taken out, 
when it is then called gross interest. ISTet interest is 
the result after these contingent expenses have been de- 
ducted, and is the true income on capital itself. 

Economic Interest and Loan Interest. 
We should also distinguish between economic or natural 
interest and contract interest. Economic interest is actual 
return to capital on account of its value-creating power 
in the process of production. Loan interest represents 
simply contract interest, and is the amount paid to the 
lender by the borrower for the use of capital. In the 
ordinary treatment of interest, loan interest is considered 
rather than economic interest. The loan interest may be 
greater than economic interest, but in the long run it tends 
to approximate it when the two elements of risk and com- 
mission are left out. The chief difference between eco- 
nomic interest and loan interest lies in the variation in 
loan interest caused by the favorable or unfavorable con- 
dition of the loan. Thus, current rates for short loans gen- 
erally vary greatly from current rates for long loans. But 
there is a normal rate to which the variations of current 
rates usually tend in a community, which comes very nearly 



176 



ECONOMICS. 



the economic interest, — just as contract wages or contract 
rent tends to conform to economic wages and economio 
rent, respectively. The essential fact in interest does not 
necessitate a loan, for interest arises from the use of 
capital even when it is used by its owner. The man who 
engages in business for himself and allows in his accounts 
a record of the interest on his own capital, not only ob- 
serves a good business principle, but also approximates 
an economic truth. He usually records the current rate, 
but recognizes the income that naturally arises from 

capital. 

Development of Theories of Interest. 

There have been very many theories respecting interest 
advanced by the people of ancient time, as well as by dif- 
ferent economists. This fact, however, does not interfere 
with a true theory of interest. All interest was called 
usury by the people of the middle ages. And indeed the 
Bible calls interest usury, and speaks decidedly against 
the man who takes usury. When the Hebrew writers 
urged against the charge of interest, the economic life 
was entirely different from what it is at the present day. 
Capital was then loaned for the purpose of relieving 
distress, without thought of putting it in business for the 
purpose of earning a large return to the borrower. Aris- 
totle held that money was a barren thing; that it could 
not beget money, and therefore that it was wrong to 
charge interest. In the first place, his mistake was in 
supposing interest was charged on money instead of on 
capital, of which money was only a single form. In the 
second place, the modern processes of economic produc- 
tion had not yet appeared. 

Aristotle says that the most hateful of all ways of 



ECONOMICS. 



177 



earning money is nsurv, which makes a gain out of the 
money itself without the natural use of it. " For money," 
he says, "was intended to be used in exchange, but not 
to increase interest. And this term usury, which means 
the birth of money from money, is applied to the breeding 
of money because the offspring resembles the parent. 
Wherefore, of all modes of making money this is the most 
unnatural." But Aristotle with all of his wisdom and 
learning could have known nothing of the industrial 
revolution, of division of labor in its extended form, of 
power manufacture and the consequent modern uses of 
capital, and therefore could have well assumed that a 
thing might be quite unnatural in his day which is quite 
natural in our day. Although he was the most learned 
of the ancients, he could not be expected to ha've antici- 
pated a science which had not yet been created; nor could 
other pagan writers, who held that money is by nature in- 
capable of bearing fruits, that the lender's gain therefore 
cannot come from the peculiar power of money, and that 
it can only come from a defrauding of the borrower, know 
of future development of industry through capital. But 
Athens, and Rome herself, as civilization grew more com- 
plex, found the charging of interest to be an inevitable 
result of complexity of business relations, notwithstand- 
ing the learning of Aristotle. 

In the middle ages the writers and ecclesiastics treated 
the subject more thoroughly; and at the close of this 
period, when political economy was gradually developing, 
many of them finally acknowledged the right of interest 
to exist, — a conclusion reached through their philosophy^ 
^12 



178 



ECONOMICS. 



for they counted the practices of the world all wrong and 
could not learn of them. The old canonists of the twelfth 
and subsequent centuries tried to argue against the pay- 
ment of interest as an abhorrent thing. Thus Gonzalez 
Tellez wrote : " So then as money breeds no money, it is 
contrary to nature to take anything beyond the sum lent, 
and it may with propriety be said that it is taken from 
industry than from money, for money does not breed, as 
Aristotle has related." 

Covarruvias, another of the canonists, wrote : " The 
fourth ground is that money brings forth no fruit itself, 
nor gives birth to anything. On this account it is inad- 
missible and unfair to take anything over and above tlie 
lent sum for the use of the same, since this is not so 
much taken from money, which brings forth no fruit, 
as from the industry of another." 

And again Vaconius Vacuna : " Therefore he who gets 
fruit from that money, whether it be pieces of money 
or anything else, gets it from a thing which does not 
belong to him, and it is accordingly all the same as if 
he were to steal it." 

Thomas Aquinas considered the element of time in 
interest, and held that he who charged interest charged 
for time, which belonged alike to all, and a thing of 
which no one could make a monopoly without robbery. 

There were four points in the doctrine of the canonists, 
viz. : 

1. Loan interest is simply an income which the lender 
draws by fraud or force from the borrower. 2. The lender 
is paid in interest for fruit which barren money cannot 
bear. 3. The lender sells a use which does not exist, or 



ECONOMICS. 



179 



which in reality belongs to the borrower. 4. The lender 
sells time, which belongs to the borrower just as much 
as it does to the lender and to all men. In every sense 
interest appears as a " parasitic profit extorted or filched 
from the defrauded borrower." These illogical and unjust 
arguments appear very crude to us to-day, who have so 
long been accustomed to the payment of interest. Yet they 
serve to illustrate the truth that former ages had their 
vagaries and visionary theories as well as this, considered 
in the light of dogmatic teaching. During the sixteenth 
and down through the eighteenth centuries the arguments 
against interest gradually subsided. The world went on 
practicing the use of interest without taking heed to the 
sayings of the philosophers. Sometimes in recent years 
people revive the old controversy in a new way, apparently 
not conscious of the exploded theories of former days. 

Among modern economists there have been a variety of 
views set forth, some of them of entirely opposite char- 
acter. Thus, James Mill and McCulloch held that in- 
terest was nothing but the wages of labor stored up in 
capital, and as all capital was originally formed of 
labor, that the interest on the capital corresponded to the 
wages of labor. The explanation of the origin of capital 
and its service in production would indicate that this 
is not only a confusion of terms, but also hints at that 
which is not true. It was held by Turgot and supported 
by Henry George, that interest derived its reason to be 
on acount of live capital which brought forth a return 
without accompanying labor. Thus, land, animals, bees 
and wine would yield a return without labor. From this 
as a starting-point, they held that other capital should have 



180 ECONOMICS. 

the same return. This traces interest to a natural source. 
More recently Menger, J. B. Say and Hermann held 
that capital brought forth interest because of its especially 
favorable investment, which yielded a return over and 
above its normal productivity. Other writers have tried 
to show that capital has some peculiar power of increasing 
so that interest will grow out of it under all circumstances ; 
but these people overlook the idea of time, of risk, and of 
abstinence or the special diversion of capital into certain 
channels. While abstinence is not the cause of interest, 
it is indispensable to the formation of interest, becauses 
through it capital is placed in a condition of service. 

Another very erroneous idea is that interest is robbery; 
that the product ought all to go to labor, but a robber seizes 
that which belongs rightly to others and calls it interest. 
These writers, among whom are Marx and Rodbertus, 
hold that there is no rational cause for interest. If told 
that because a man owns property he has a right to 
pay for the same, the followers of these writers have 
asserted that man has no right to private property, and 
they cry out with Proudhon, that " property is robbery." 
But they claim if labor had received its share of the 
net earnings there would be no capital accumulated in 
the hands of those who do not labor. But this does not 
say that the capital would not have its existence, and that 
the laborers who would own it could not charge interest 
or at least have a right to it. In fact, this is the real 
case, for the laborers of this life are the capitalists; they 
are the ones who save and who obtain a return from their 
savings. In reality, granting two points,— that a man has 
the right of property and that the laborer has the right of 
wages, — I have no more right to ask a man to allow me 



ECONOMICS. 181 

to use his capital without a return than I have to ask 
him to work for me without a return in wages. How 
absurd for me to say to a man, "You are stronger than 
I, and as I have work to be done which will greatly 
benefit me, if you will come to work for me I shall have 
a better living, a finer house and more leisure ; and for 
this service I propose to pay you nothing, because you 
have no right to charge me for such services." Would 
it not be equally absurd for me to say, ''You have a thou- 
sand dollars and I have none; let me take your money, 
as I know a profitable investment where I can make a 
large return in a short time " ? And you say, " What 
will you give me for the use of this money ? " I say, 
" Nothing ; you do not need it and I do." How absurd 
such a proposition would be ! 

Interest a Premium on Exchange. 
In his admirable work on Capital and Interest, Boehm- 
Bawerk gives a careful review of all theories, and finally 
advances his own, which seems to throw much light upon 
the subject. He holds that a loan is an exchange of 
present goods against future goods. On account of the 
ordinary desires of man to value present things more than 
future ones, a lump of capital is worth more to-day than 
its future valuation for a year from to-day. Hence if 
prcsent commodities command a premium over future 
ones, it is to be observed that a sum of present wealth 
is to be had only at the price of a greater one in future. 
This premium is the net interest. This places all loans 
on a purely exchange basis, and makes interest the differ- 
ence in the price of a commodity of to-day from the same 
commodity a year from to-day. It is a simple business 
way of estimating interest, and disposes effectually of 



182 



ECONOMICS. 



the theories which have been advanced to show that money 
is barren, or that money is fruitful in itself, or that in- 
terest is robbery. That is, you have a horse which I ask 
you to loan me for a year. To-day the horse is worth $100. 
But I will not agree to give you a hundred dollars for 
the horse a year from to-day, because, supposing that 
he will be in good condition then as now, a year's service 
has gone. Hence if I borrow the horse for a year I must 
return something besides the horse to make an even trade. 
It is the same with the hundred dollars being worth more 
money to-day than it will be a year from to-day, — I agree 
to pay that difference, which is $8 or $6, as the case may 
be. This is called interest, and may be paid now or a 
year from now. This interest is usually calculated in a 
given rate on the principal, which is sometimes mislead- 
ing. 

Bate on Loans. 

The rate on loans varies slightly during a long period 
of time. There is a steady decline in interest as society 
becomes more stable and business investments more per- 
manent. But the rates vary in different countries as well. 
In England interest is lower than in Boston, and it is 
lower in Boston than in Kansas City. The chief causes 
of this are, first, the amount of available capital seeking 
employment in older countries; and, second, the element 
of risk. People do not like to take the risk of loaning 
money in new and unsettled countries, or in lands far 
away from home. In the former case they will do so if 
the interest is large enough to tempt them to take the 
risk; in the latter case, if interest is sufficient to cover 
risks and agents' commissions, they may make loans. I 
said that the rate of interest continually decreases, although 



ECONOMICS. 



183 



the process is a slow one if we exclude the element of 
risk, which may cause a sudden change in the interest at 
any time. Thus, in early times in Kansas, money was 
loaned at the rate of eighteen per cent., and it was not long 
ago that current rates were twelve and thirteen per cent. 
Now, the usual rate is eight per cent, at banks, while first- 
mortgage loans are six and seven per cent, in eastern 
Kansas, and four-per-cent. school bonds sell readily at 
a premium ; while banks charge ten per cent, on short-time 
loans. In 1876 in California one and one-half and two 
per cent, per month were common charges in many parts 
of the State, while one per cent, per month was a fair 
average in San Francisco. The great cause of this decline 
is in the fact that large amounts of capital have accumu- 
lated in London and in the large cities of the eastern 
part of our nation, which are seeking investment. And 
on the other hand, the West, having become more 
stable than formerly there is less risk engendered. The 
yearly average of interest in London for the last twenty 
years has been less than four per cent. ; it exceeded that 
amount but one year. In 1888 the British debt was 
funded at two and three-fourths and two and one-half 
per cent., and it is not uncommon to charge only two and 
two and one-half per cent, for money in London. People 
are glad to get four to five per cent, in H^ew England 
on gilt-edged security. It is difficult to loan money at 
five and one-half per cent, in Kansas City on first-class 
security. Other things being equal, the rate of interest 
will depend on the amount of available capital seeking 
employment; or in other words, upon the demand and 
supply. But other things are not always equal. For 
example, in times of panic and unsettled business there 



184 



ECONOMICS. 



may be plenty of money with interest low, or at certain 
stages there may be plenty of money and interest high^ 
but where a large amount of money seeks honest and 
legitimate investment it must have an effect in lowering 
interest. The rate of interest will vary, secondarily, ac- 
cording to the desire of people to enter new business, and 
it is also somewhat dependent upon the character of the 
borrowing community. If the latter has a record of pay- 
ing debts promptly and without failure, more favorable 
terms of interest may be had; while if there are doubts 
as to its solvency, the rates of interest are higher. 

Effect of Cheap Honey on Interest. 
Some people, and even some economic writers, have 
been mistaken as to the effect of a cheaper money on in- 
terest. If the purchasing power of money could be reduced 
one-half it would not cheapen interest, as an inflated cur- 
rency has no perceptible influence on interest. For if the 
interest is paid by a given per cent., the same proportion of 
the cheap money will go to pay the debt. In another way, 
however, inflation frequently leads to speculation, and 
this brings on a higher rate of interest. If, however, a 
debt is contracted in one form of money and the interest 
made payable in another, dearer form of money, then 
interest will be increased directly by inflation. 

Legislation and Interest. 
One of the most difficult points to consider in relation 
to interest is the result of legislation on interest. Can 
a single State reduce the rate of interest by passing a 
law to reduce it below the current commercial rate ? The 
general tendency of all legislation to reduce interest is 
to make it more difficult for the borrower. However, there 



ECONOMICS. 



185 



are some things to be observed in connection with this 
general assertion. So long as a State can by the power 
of legislation change the custom or habits of the people, 
there is some governmental power in the reduction of in- 
terest. Suppose the current rate based upon the supply 
and demand in a given State should be eight per cent., 
and suppose the legislature should suddenly pass a law 
that no more than five per cent, should be charged, and 
fix a heavy penalty for disobeying the law. Two things 
will occur: first, money will seek other countries for an 
investment and the current rate will rise; second, the 
law will be evaded, if not violated, and those persons who 
borrow money will suffer. However, if in this given 
State people have been charging a large interest through 
long custom and lenders have a sort of monopoly on loan 
funds, laws may be passed asserting, for example, that six 
per cent, is the proper rate of interest; this measure will 
have a large influence in the reduction of interest, if there 
be a considerable amount of home capital. For the bor- 
rower will borrow less money, rather than to take it at 
a price which is declared exorbitant. And lenders, rather 
than have their money idle and rather than have it leave 
the State for a higher rate, will loan at a lower rate. Like- 
wise, lenders will slowly adjust themselves to the new 
rate, simply because their attention has been called to 
the fact. In some Eastern States the rate has been fixed 
for years at six per cent. In these States, in country towns 
and country places at least, no one thinks of charging 
more. It is not the law so much as custom, education, and 
I may say religion, that keeps the rate below this maxi- 
mum. On the other hand, without any collusion the banks 
of a small town may demand a certain rate because they 



18^ ECONOMICS. 

have always charged a certain rate, and thus refuse to take 
less. People who must have money will pay the charges 
rather than go without ; but the same custom is observed 
to a large extent in merchandise in a small town, because 
it is slow to feel the rise and fall in the general market. 
Custom rules to a considerable extent, although these are 
really exceptions to the general law. Legislation for the 
reduction of the rate of interest has generally proved to 
be a dangerous thing for the borrower. A law fixing 
a maximum rate is very valuable in cases where no rate 
is mentioned in contracts, or where a judgment for interest 
is rendered. It also to a certain extent prevents extor- 
tion in certain cases. This is absolutely essential in all 
well-regulated countries. 

Interest as an Economic Factor in Distribution. 
While it has been stated that land and labor are the 
two essential factors in production, and precede capital 
in logical order, it is also known that when capital is 
once created it enters into production and claims its own 
reward in interest. Interest must always be satisfied 
wherever capital is used in production. The wages of 
labor and the rent on land are not more certain than the 
interest on capital. In the process of production many 
people go into business who are not capable of manage- 
ment, and interest finally absorbs their earnings and the 
result is they must quit business. But this does not mili- 
tate against interest as a natural factor in distribution. 
Capital is a necessity in modern production, and its just 
reward is interest, which must be paid. 

References: Clark, J. B., Capital and Its Earnings; Boehm- 
Bawerk, Eugene von, Capital and Interest; Ely, E. T., Outlines 
of Economics; Cassell, G., Nature and Necessity of Interest. 



ECONOMICS. 



187 



CHAPTER V. 



PROFITS. 



Oross Profits. 

Some classify all the returns of industry as profits, in- 
cluding rent for the use of land, interest on capital, and 
profits of management; but it is profits of management 
that concern us in the present analysis. Gross profits 
must be distinguished from the profits of the entrepreneur 
or manager, which are called pure profits. If we would 
consider any given business we should find that there must 
be a replacement of the amount of capital used out of 
the entire receipts of the year ; that the interest on capital 
must be paid, and also a certain sum in the forrti of a pay- 
ment for risk must be set aside to tide over bad years ; and 
that the wages of superintendence must also be paid. If 
there is anything left out of the returns for a single year 
we call it pure profits, which goes to the manager of the 

business. 

Pure Profits. 

If we consider normal industry we shall see the division 
of the net product into the different shares accruing to 
landlord, capitalist, and laborer; we shall observe that 
industrial enterprises go on from year to year working on 
this basis. The managers of business may receive nothing 
more than the wages of superintendence. So long as they 
receive this, business will continue. If they fall short of 
this, business will cease. But there are certain concerns 
more favorably situated or better managed than others, 



loo ECONOMICS. 

which yield a surplus of profits over aud above the pay- 
ment of the ordinary expenses of business. This surplus 
of pure profits accrues on account of excessive skill of 
management. It has sometimes been called the rent of 
superior characteristics. It more naturally falls into this 
category than any other. Yet according to most writers 
it is called profits, and we follow the rule to avoid con- 
fusion. Business ability or the quality of management 
makes the return of profits uncertain and indefinite. 
ISTevertheless it is true that all businesses can be arranged 
in a group, passing all the way from no-profits industry 
to that of a large return. 

Competition and Profits. 

Competition also destroys pure profits, or tends to re- 
duce them. The person who obtains some means of pro- 
ducing cheaply, or has obtained a desirable location, or by 
skill in advertising has succeeded in making a large profit, 
cannot continue long before others discover his secret and 
enter the same field. Hence in any given industry profits 
continue to decrease gradually ; and the older the country 
the more rapidly they decrease. Hence there is a tendency 
to level down profits. 

The Managing Class. 

The ]30wer of the managing class in business is very 
great. An observation of the number of failures in busi- 
ness of any sort or description is evidence of the need of 
skill to conduct business properly and with j)rofit. Thou- 
sands, presuming upon a skill they did not possess, have 
wrecked their business and dragged others down with them. 
In discussing the labor problem, or the problem of capital, 
not sufficient importance has been given to the managers 



ECONOMICS. 



189 



of business, who are the true employers of labor; nor 

sufficient credit for their part in productive enterprises. 

Without them the wheels of industry w^ould stop; the 

modern process of production includes them as essential 

factors. 

Profits and Bent. 

As was stated above, the law of profits is to a certain 
extent governed by the same law as that of rent. The 
power to command profits must rest upon exceptional op- 
portunities and exceptional abilities wdiich combined 
make profits possible. There are a large number of people 
who are doing business for the sake of profits who obtain 
no return. All that their business pays is the wages of 
labor, interest on capital, and wages of superintendence, 
together with other expenses such as rent, taxes, insurance, 
etc. Pure profits do not emerge in the transaction. The 
result is that these businesses will continue to run imtil 
a fall in price or depression in trade causes them to close. 
Other businesses in the same line, on account of favorable 
location, the prestige of business through trade-marks^ 
advertising, and other means, or through superior skill of 
management, yield a return in pure profits. It is easy to 
observe that the principle here is the same as that of rent. 
The chief difference is that profits arise from very uncer- 
tain conditions. There is less regularity in the appearance 
of profits than in the appearance of rent, nevertheless 
the principle involved is the same. While strictly speak- 
ing there might be no condition of business in which gross 
profits might not rise, there might be conditions of business 
in which pure profits might not be seen. But even this 
condition cannot long continue, for the entrepreneur who 
makes no return in a given year hopes to make the year 



190 ECONOMICS. 

following. When he realizes that he does not receive 

profits, unless he be manager of his own business and 

receives wages of superintendence, he will cease to carry 

on business. 

Pure Profits and Market Prices. 

It is evident that pure profits do not enter into the 
price of commodities in a market, nor do they interfere 
with wages in any form. Profits themselves are obtained 
from wealth, which is created by extraordinary abilities 
or opportunities. The price of manufactured goods in a 
market is determined by the supply and demand, and 
the price has a tendency to fix profits rather than profits 
the price. The market price of goods is always indicated 
by the cost of production of that proportion of the supply 
which is produced under the most disadvantageous cir- 
cumstances, just as the corn raised upon the poorest soil 
cultivated is an indication of the market price because 
the soil will be cultivated when it will barely pay the 
cost of production. Therefore the cost of production on 
poor land is evidence of the market price of the product. 
The same is true in regard to profits. The no-profits enter- 
prise shows the cost of production, and as long as it pays 
the work will be carried on ; that is, as long as the market 
price covers the cost the business will continue. Thus 
the no-profits business is an indicator of the market price, 
rather than a cause. Hence it will be seen that profits 
have nothing to do with the establishment of the market 
price. 

As the payment of wages is a part of the cost of produc- 
tion, it is easy to see that pure profits are not increased 
by the reduction of wages. Considering the gross product, 
it is seen thai wages are a variable proportion of it. It is 



ECONOMICS. 191 

also seen that profits are a variable proportion of a varia- 
ble product, and if in all the factors of distribution any one 
can be considered a residual claimant, it is profits. There- 
fore pure profits do not lower wages. 

Monopoly Profits and Monopoly Prices. 

Elsewhere we have referred to monopoly prices and 
monopoly profits. All profits are necessary, tempo- 
rary, or monopoly profits. The necessary profits are that 
j)ortion of the gross profits which keeps business running 
and without which business would cease. Temporary 
profits are those that are obtained from advantageous sit- 
uation, opportunity, and skill of management, and are con- 
sidered as pure profits. Monopoly profits arise when 
exclusive control of a given business is obtained, and are 
essentially more permanent than others. They arise from 
the universal control of *a given business in which compe- 
tition is shut out. The monopoly price is established 
on the basis of the largest possible return for a given busi- 
ness. It is only necessary to determine at what net price 
the business will yield the largest return of net income. 
For example, if we consider the possible prices of a given 
commodity to be six, eight and ten cents per pound or 
article, it is observed that if nine cents per pound there 
will be a given amoimt sold. If the price is raised to 
ten, the sales will be less and consequently expenses 
somewhat lessened in proportion to the sale. If the price 
is reduced to eight, the sales will be increased until the 
demand is satisfied. But with the increase of sales will be 
the increase of expenses. If the price is reduced to seven^ 
the sales will be enlarged and the expenses increased. ISToav 
at what point will be the largest net return ? This point 



192 ECONOMICS. 

will be when the sales are relatively large and the ex- 
penses relatively small. Every monopoly working on a 
business basis will seek to find this monopoly price; 
though it has the power to charge a high price, it will not 
do so unless it can increase its income thereby. As a rule, 
permanent monopoly prices are steadier and lower than 
competition prices ; and in most businesses it is true that 
the actual price is lower than the permanent monopoly 
price, for fear of competition which might set in where 
there are evidences of enormous profits. For nearly all 
monopolies are subject to changes, and may not be con- 
sidered absolutely necessary, permanent affairs. 

References : Walker, F. A., Political Economy ; Hadley, A. T., 
Economics; Ely, R. T., Outlines of Economics; Hobson John A., 
The Economics of Distribution ; Clark, J. B., The Distribution of 
Wealth. 



ECONOMICS. 



193 



CHAPTER VI. 

OOOPEEATION AND PKOFIT-SHARING AS PROCESSES OF 
DISTRIBUTION. 

Nature of Cooperation. 

There is unconscious cooperation of all people engaged 
in production. There is also the conscious cooperation 
of people in the form of firms, trusts, corporations, and 
business houses. But cooperation in its purely economic 
sense means a union of laborers in a given enterprise, 
either of production or distribution. Where laborers band 
together, use their own capital, manage their own business, 
pay themselves wages, and thus have a right to the entire 
product of the industry, we call it cooperation. During 
the last half-century many attempts have been made to 
carry on this kind of cooperation, more or less of which 
have been successful. The real object is to get rid of 
the manager of business, who obtains the pure profits for 
himself, and make a division of these profits among the 
laborers. After wages, interest on capital, and the gen- 
eral expenses of management have been paid, the surplus 
earnings are divided among the members of the coopera- 
tive association. 

Distributive Cooperation. 

Cooperation is generally considered of two kinds : dis- 
tributive and productive. Distributive cooperation is a 
trade operation for the distribution of goods, on a profit 

which is to accrue to all members of a given association. 
—13 



194 ECONOMICS. 

If an association is formed for the purpose of conduct- 
ing a store with special privileges to its members, an indi- 
vidual is employed to manage the store, clerks are hired, 
and wages paid. Money is borrow^ed, on which interest 
is paid, and all the ordinary expenses of the business are 
paid the same as in any other mercantile enterprise. Each 
member of the association puts in a certain amount of 
capital, which becomes the basis of the stock. Members 
then have special privileges of buying. They either buy 
their goods at a reduced rate, or, what is better, buy at 
an ordinary rate, receiving tickets stating the amount 
purchased. At the close of the quarter of the year, when 
all expenses have been paid and capital replaced, a divi- 
sion of profits occurs on the basis of amount of purchases 
of each individual. The Grange stores and the Farmers' 
Alliance stores of the United States have been the most 
prominent examples of this kind of cooperation in Amer- 
ica. In England numerous societies have been formed 
in the past sixty years, and also in Erance and other 
countries. In England and Erance, especially the former 
country, distributive cooperation has been carried on with 
great success, although as a rule the experiment has failed 

in America. 

Productive Cooperation. 

This involves the creation of goods. Eor example, a 
number of laborers desiring to get rid of the managers, 
or "bosses" as they are termed, band themselves together^ 
each one putting in a certain amount of capital to start 
the business. They either choose one of their members as 
an overseer, or hire some one for this purpose. Virtually 
they are laborers without masters, directing their own 
business and seeking to obtain the entire surplus of their 



ECONOMICS. 195 

earnings. If business enlarges, they mav take in more 
members or liire laborers to help. The goods manufac- 
tured are sold on the market in competition with goods 
of other firms. At the close of the business year, after 
they have allowed themselves wages, paid the interest on 
"capital and the wages of management and all expenses of 
the business, they divide the profits or share the losses 
of the business. Wherever opportunities have been favor- 
able for the development of cooperative business and from 
the first good management has been secured, productive 
cooperation has succeeded. But it is much more difficult 
than distributive cooperation, and therefore has not met 
with the same success. 

Distributive Cooperation in England. 

The most remarkable success of distributive cooperation 
has been in England. Robert Owens and others agitated 
the question of cooperation largely upon a communistic 
basis, and from 1820 to 1840 numerous experiments were 
tried in England, nearly all of which completely failed. 
In 1840 a group of weavers calling themselves the Eoch- 
dale Pioneers formed a cooperative association and opened 
a sniall store. It appears that at this time retail prices 
were very high, and that articles furnished laboring-men 
were of a very poor grade. The aim of this cooperation 
was to furnish good, substantial, unadulterated articles 
at a fair price to the members of the association. They 
began with a very small capital, each one furnishing a 
pound sterling, which was to be paid in installments. 
The establishment flourished and enlarged, becoming a 
successful business enterprise. Other societies were soon 
formed, until there are a large number in England carry- 



196 



ECONOMICS. 



ing on a successful business. After a large number of 
retail establishments bad been formed, they began to or- 
ganize wholesale establishments. So that England to-day 
has a system of distributive cooperation extending through- 
out the United Kingdom. 

The Rochdale society grew from a small membership, 
and an insignificant business with a small store, into three 
large cooperative branches, having in 1895 19,064 mem- 
bers ; a share and loan capital of £476,222 ; an annual 
trade of £402,222, which yielded an annual profit of 
£57,Y76. More than this, the movement that started in 
Rochdale spread throughout the entire country, until in 
1895 there were 1,486 distributive societies, having 
1,314,093 members. The share, loan and reserve capital 
amounted to £16,494,630 and the annual trade to £34,- 
224,815, which yielded a net profit of £4,892,712. The 
principles controlling distributive cooperation are so well 
learned in England that there are few failures now, com- 
pared with the number of successes. 

In Erance distributive cooperation has not been carried 
on in such an extensive manner nor with such marked 
success, although the excellent work done there is re- 
markable. It is unfortunate that in the United States 
so many wrecked institutions have followed in the wake 
of the two great movements known as the Grange and 
Farmers' Alliance. The causes for these failures, how- 
ever, are attributable to two distinct sources: first, that 
the principles governing distributive cooperation are not 
so well understood in America; and second, that politics 
in each case has steadily impaired the usefulness and 



ECONOMICS. 



197 



success of these two great institutions, primarily organ- 
ized as non-partisan industrial enterprises. 

Productive Cooperation in England. 
The success of productive cooperation has been of more 
recent date in England. Indeed, it is much more diffi- 
cult to manage than distributive cooperation, for it must 
depend upon the market of goods after they have been 
created. ISTumerous experiments have been tried in differ- 
ent countries with varying success, but it was not until 
1870 that the movement received the impetus which 
brought it permanent success. Several productive socie- 
ties were formed on a cooperative basis, in which the 
wage-earners became their own managers and secured to 
themselves all of the surplus profits. These efforts were 
greatly forwarded in 1884 by the establishment of " The 
Labor Association," which had for its special work the 
promotion of cooperation among the wage-earners. The 
importance of this association is sufficient reason for set- 
ting forth in detail its objects as given by Mr. E. V. 
Neale, its first president and founder: 

" To form public opinion on the subject of associated 
labor by the following means, viz. : 

"1. The publication and supply of literature. 

"2. The delivery of lectures, addresses, etc. 

"3. The holding of conferences of all classes of persons 
interested in the elevation of the worker. 

"4. To assist workingmen to organize themselves for 
mutual employment. 

"5. To enlist the active members of the trade societies 
in the cooperative movement. 

"6. To secure a united action of trade-unionists and 
cooperators for mutual benefit and progress. 



198 ECOJsroMics. 

"7. To give information generally on the position of 
cooperative workshops and condition of workers." 

In order to carry out these principles and to obtain 
these objects, branches and lodges of the Association were 
formed, each governed by rules and regulations best suited 
to the ends sought. " It will be seen/' says Mr. j^eale, 
"that the Labour Association is essentially a propagandist 
body^ which seeks to form opinion, and thus to stimulate 
action, and, if it succeeds in calling forth productive socie- 
ties, may serve as a valuable union among them ; but does 
not itself propose to engage in any productive enterprise, 
and therefore will not in any way pledge the responsibility 
of any persons who may want to join it, by any sort 
of commercial undertaking." By the means of this strong 
agency the cause of cooperation is kept before the people 
interested, and its gospel perpetually preached. 

Among the societies that had exhibits at the Crystal 
Palace in 1896 the following industries were represented: 
Agricultural and Horticultural; Worsteds; Manufacture 
of llTeedles; Bookbinding; Boots and Shoes; Piano- 
fortes; ISTails; Pottery; Cotton Goods; Tannery; 
Watches; Buckets and Fenders; Quilts; Engineers' 
Goods; Household Goods; Ironworks; Clothing; Hosiery; 
Printing ; Cocoa ; Leathergoods ; Ship- and Boat-Building ; 
Padlocks ; Woolen and Cotton Goods ; Sundries ; Silks ; 
and Woolens. Thus it is seen that the cooperative socie- 
ties cover a wide range of industries and are capable of 
engaging in almost any enterprise. The progress of most 
of these associations is very slow, and yet the permanent 
and business characteristics are evident. Take as an ex- 
ample the Hebden Bridge Fustian Manufacturing Co- 



ECONOMICS. 



199 



operative Society, Limited, which was organized in 1870 
for the purpose of manufacturing fustians, velveteens, 
cords and modes of all kinds. Hebden Bridge had long- 
been the center for the manufacture of fustians. But the 
trade had for some time been disturbed and the relations 
l)etween employers and employees had been strained. 
There was much suffering among the work-people. When 
one of their number, an old man, died on account of 
carrying too heavy a burden, it was necessary to raise 
funds by subscription to give him a decent burial. This 
was the occasion of forming a friendly society to provide 
for cases of this kind. They fixed the assessment at 
threepence per week, and agreed that the funds should 
be devoted to the establishment of a fustian cutting and 
dyeing establishment. About thirty, all poor men, formed 
the original company. Their subscriptions were at first 
very meager, but they continued to lay aside their earn- 
ings. When they accumulated £10, it was invested in a 
cooperative store in town. It was estimated that it would 
take £1,000 to purchase a dyeing establishment and rent 
a place to carry on the work. They rented a small room, 
and used their spare time to fit it up, and to put in a few 
fixtures. By vigorous work they found at the end of the 
first quarter they had a capital of £37 7s. and lid., with 
Avhicli to begin work. The members did the work at the 
usual rate of payment, and this added to their share 
capital. The local stores became their customers and their 
market enlarged to adjoining to^vns. The society soon 
had sixty members, and they began to manufacture ready- 
made garments as well as cloth. In 1874 they extended 
their business and opened a dyeing shop, and in 1886 



200 



BOONOMIOS. 



thej enlarged their plant and began to weave their own 
fustians. The constant progress of the society is best 
illustrated by the following table: 



CAPITAL. 



Members. 


Shares. 


Loan. 


Beaerve. 


Sale*. 


95 


83 


£3 




£55 


384 


15,693 


3,065 


£556 


18,625 


684 


21,764 


9,081 


1,595 


38,794 


732 


22,399 


3,979 


1,427 


40,178 


742 


23,749 


9,840 


1,937 


39,578 


746 


24,497 


8,652 


2,610 


39,991 


769 


24,904 


8,770 


2,890 


40,317 


797 


25,845 


6,771 


3,859 


43,569 



Profits. 



1870. 

1880. 
1890. 
1891. 
1892. 
1893. 
1894. 
1895. 



£3 
1,774 
3,499 
3,723 
5,118 
4,427 
4,171 
5,185 



At first, all profits accruing to workers are accredited 
to share account, until they have each £20 of stock in the 
association. In 1894 the results of business were as fol- 
lows: The total amount paid to workers as wages was 
£12,851, and the amount of profit to workers was £642, 
computed on the basis of one shilling in the pound for 
wages paid. The average number of workers during the 
year was 294. Of the Y97 members on the books at the 
close of 1895, 297 were workers, 300 were cooperative 
societies, and 200 were outside shareholders. The capital 
stock was held as follows: workers, £7,398; cooperative 
societies, £10,415 ; outside shareholders, £8,032. 

ITearly all of the cooperative societies divide their 
profits among purchasers according to the amount of the 
purchase. A certain per cent, is given to capital, a certain 
wage and profits to labor, and a certain per cent, to cus- 
tomers. More than this, certain amounts are set aside 
for education, insurance, care of the sick, etc. Thus, in 
1895 the society described above devoted £60 to education. 
It was one of the oldest societies formed. Among the 



ECONOMICS. 



201 



modern societies much more attention is paid to educa- 
tion and miscellaneous expenditures. Many of the manu- 
facturing cooperative societies have stores of theiv own, 
or else make sales in connection with other cooperative 
stores. Thus, the Kettering Cooperating Boot and Shoe 
Manufacturing Society was established in Kettering^ 
where there was a cooperative store of 3,070 members 
in 1894, having an annual trade of £57,613. The manu- 
facturing society, after providing for interest on capital 
and depreciation, divided the gross profits as follows: 
40 per cent, to workers, divided pro rata on wages paid; 
40 per cent, to customers, divided pro rata on purchases; 
5 per cent, to managing committee; 5 per cent, to provi- 
dent fund; 2| per cent, to educational purposes; and 
7^ per cent, to capital reserve. The society is managed 
by a committee of twelve, chosen by the shareholders. 
Each member is required to hold five shares, and may 
not hold more than twCnty-five. After reaching that 
amount, any further addition he makes to this investment 
is credited to loan account to the extent of £25, receiving 
five per cent, per annum and not sharing in the bonus 
on transferable shares. The business of this establishment 
has grown since 1889 from £3,588 to £26,255, in 1895. 
The growth of the entire cooperative enterprise is best 
illustrated by the following table: 



18BS. 


ms. 


189i. 


15 


109 


120 


£160,751 


£1,292,550 


£1,371,424 


103,436 


639,884 


799,460 


9,031 


67,663 


68,987 


114 


2,984 


3,135 


8,917 


64,679 


65,852 




8,283 


8,751 



1895. * 



Number of societies . . 

Sales for the year 

Capital — share, loan, 

reserve 

Profits 

Losses 

Net profit 

Profit to labor 



155 

£1,859,876 

915,302 

94,305 

2,296 

92,109 

14,235 



* Distributive and Productive Cooperation have continued to develop In England. 



202 ECONOMICS. 

Cooperation in the United States. 

The principle of cooperation in the United States has 
been used in very many different forms. Communistic so- 
cieties have been established on a religious basis which 
have involved the principle of cooperation both productive 
and distributive. Very many other experiments have been 
tried for the purpose of building a complete social com- 
munity like the Brook Farm experiment in ISTew England 
and the Icarian community in Iowa, and in nearly every 
instance the philosophical or religious element entered 
in. More than fhis, the underlying principle was to 
control the entire life of the community, — religious, 
social, political, and economical. 

The two great movements of distributive cooperation 
in the United States were those of the Grange and the 
Farmers' Alliance. The Grange, which was organized 
in 1866 and received its greatest impulse about ten 
years later, established distributive cooperative stores in 
nearly every State in the Union. These stores were to 
be owned and controlled by the farmers of their several 
communities, to order their goods directly from the manu- 
facturer, and thus do away with the so-called middlemen 
and thus realize a margin of consumers' profits to the 
members of the association controlling the store. These 
stores met with varying success, a large number of them 
finally ending in total disaster. Only a few, which had 
a strong corporate existence and had entered somewhat 
into the nature of monopoly, were enabled to survive 
the stress of competition. There are many causes to which 
the failure of these cooperative institutions may be traced. 
Among the chief of these are found the failure of man- 



ECONOMICS. 



203 



agers to understand their business, tlie lack of union among 
the farmers in the association, the competition of more 
strongly organized firms with plenty of capital, and 
finally, the political trend of the association. 

The Farmers' Alliance, which sprang up somewhat 
later, was but a revival of the old Grange movement; 
but the same principles were employed, which were to 
a great extent in accordance with the methods of the Roch- 
dale Pioneers. Indeed, all distributive cooperation wher- 
ever successful has worked upon this plan. The causes 
of the failure of the Farmers' Alliance were in a measure 
the same as those of the failure of the old Grange stores, 
with the exception that politics had a wider influence in 
the latter than in the former, and, it may also be said, 
from the fact that there was less need of the Farmers' 
Alliance store than of the old Grange stores. For when 
the latter were started goods were sold excessively high 
in the West, and agents' profits were extortionate; in the 
former, owing to cheap transportation and excessive com- 
petition, prices of goods in the West were not too high. 
It must be conceded that among the beneficial influences 
of the old Grange store is that of the reduction of prices, 
and the more direct communication of retailers and con- 
sumers with the wholesalers and manufacturers. A great 
service was performed in this way, not to mention other 
services of increasing the intelligence and the political 
and social union of farmers. 

Productive cooperation in the United States has many 
brilliant examples of success, and many more of wretched 
failure. ^ATierever there has been a fair market for goods 
and excellent management in business, these cooperative 
institutions have had a reasonable degree of success. 



204 ECONOMICS. 

In the establishment of any manufacturing business 
the first thing to be considered is a profitable market. If a 
good market with reasonable profits is assured, there is 
an opportunity for the success of the association. But it 
is also necessary that the association be well organized, 
and that good managers be employed in carrying on the 
enterprise. More enterprises have failed for lack of busi- 
ness management than in any other way. "S^^iile there 
is an opportunity to save time, material, tools, and to fur- 
nish an excellent quality of goods on accoimt of the interest 
that laborers take in the industry, productive cooperative 
establishments have frequently furnished a cheap grade 
of goods, owing largely to a lack of intelligent manage- 
ment. Perhaps the most successful examples of productive 
cooperation were found in the cooperative coopering es- 
tablishments of Minneapolis, where there was a ready 
market for the finished product, and where an industry 
could be started with a small amount of capital. Other 
successful examples are scattered here and there in differ- 
ent industries throughout the United States. 

Aim of Cooperation. 

The object of the cooperative society is to interest the 
laborer directly in his work; to encourage him in the 
hope of reaping the share of the profits over and above 
the fixed charges; and to make him an independent busi- 
ness man who shall have a right to determine the direction 
of his own labor-power. As soon as his interest in the 
business is established he takes stock and becomes a share- 
holder, and thus receives the right to vote in the manage- 
ment of the affairs of the society. He now becomes care- 
ful of tools and material; is saving of time and prevents 



ECONOMICS. 



205 



waste ; and he seeks to make a genuine, finished product. 
There is no need of strikes and lockouts ; the war between 
capital and labor is over, because the capitalist and laborer 
are the same. Their common interests have been demon- 
strated. 

Whenever productive cooperation can be successfully 
carried on, it has a good influence on society at large. 
Perhaps the labor problem can be solved in no other way 
except in giving the wage-earner a voice in shaping his 
own course, in managing his own business, in employing 
himself instead of being hired as a machine and thrust 
aside at the will of the employer. The idea of copartner- 
ship in business is elevating in its very thought. But if 
productive cooperation should succeed until a large number 
of workers should be employed in cooperative enterpriseSj 
these enterprises would begin to compete with each other, 
and there would be competition by groups instead of indi- 
viduals. What then would happen to those who have not 
yet joined a cooperative association ? They must of ne- 
cessity suffer the results of grinding competition, which 
harms not their more fortunate cooperative brethren. But 
the time may come when these also will be forced to be- 
come cooperative. The great difficulty is that it takes 
a long time to make good cooperative workers. It is a 
process of education — a slow process. And one of the 
chief reasons of the failure of cooperation in so many 
instances is that those who enter it are not cooperative 
men by nature and by training. Its success has finally 
been demonstrated in England, and it helps toward the 
solution of the labor problem; but its judgment is not 
final or conclusive. 



206 



ECONOMICS. 



Profit-Sharing. 

This metliod of associated work differs from both pro- 
ductive and distributive cooperation in the fact that the 
business management is still in the hands of the capitalist 
employer. The laborers share in the profits of the concern, 
but have nothing to say in the management of the business. 
However, in recent years the progress of all successful 
profit-sharing institutions is due to cooperation in which 
the laborers own shares of stock in the business and also 
have a voice in the management of the affairs. 

The method by which profit-sharing is carried on is best 
illustrated by two well-known examples in America: the 
Proctor & Gamble Manufactory, located at Ivorydale, a 
small town in the suburbs of Cincinnati, and the IST. O. 
]Srelson Manufacturing Company, at Laclair, Illinois. 
The former employs about 500 laborers at the factory^ 
besides another hundred in the Cincinnati office and on 
the road. The average wages of men is $10 per week; 
of women, $4.75; of boys, $3.50 to $7. The wages are 
considered only fair, yet the method the company has 
adopted of dealing with its employees has been such as to 
prevent any discontent, strike, or revolution. The firm 
was established in 1837, but the plan of profit-sharing- 
was adopted in 1887. It provided for the distribution 
of the profits among the employees after allowing a reason- 
able salary of $4,000 to each member of the firm who was 
actually engaged in conducting the business. The laborers 
were to receive the same proportion of the profits as the 
total wages bore to the total cost of manufacturing and 
marketing the product. For example, if the total amount 
of business done was $100,000, the amount of wages paid 
$20,000, the amoimt of profit made $10,000, then the 



ECONOMICS. 207 

total cost of making and marketing goods was $100,000 
less the profit of $10,000, or $90,000. The amount of 
wages paid was $20,000. The amount of profits given to 
employees would then be in the ratio of 20,000 to 90,000, 
or two-ninths, and the proportion to the firm would be 
as 70,000 to 90,000, or seven-ninths of the profits. The 
laborers' j^roportion of the profits was distributed among 
them in accordance with the amount of wages earned bj 
each. This plan was in force three years, during which 
the dividend or share of the profits averaged 12^ per cent, 
of the wages. 

In 1890 the firm of Proctor & Gamble was reorganized 
on the basis of the payment of 12 per cent, on the common 
stock, if this amount should be earned. This being prac- 
tically the same rate earned by the employees under the 
old plan, it was an easy and advantageous arrangement 
to adopt a plan of paying employees as their share of 
profits the same rate of dividend upon their wages as was 
paid upon the common stock of the company. This method 
was adopted, and under it profit-sharing is now carried 
on. The dividends are paid semi-annually. To illustrate 
this : suppose a man earns $500 a year in wages ; he 
receives in addition a dividend of 12 per cent, on this 
amount, or $60. The man that has $500 worth of stock 
in the company also receives 12 per cent., or $60. Thus 
the laborers and the stockholders are upon an equitable 
basis. All employees are entitled to begin to share in 
tKe dividends after being in the employ of the company 
for three months; but if one quits work or is discharged 
before three months' labor in the service of the company 
he receives no dividend. At first the laborers were divided 



208 



ECONOMICS. 



into full participants and half participants in profits. 
This was not found to be desirable, and all employees 
were placed on the same basis. ISTow, fully 98 per cent, 
of the laborers participate in the profits. The company 
reserves the right to deny the dividend to the employee 
for cause, but the amount of this unpaid dividend must 
be paid to other laborers, and does not go to the stock- 
holders of the company. 

The company not only allows sharing in the profits, but 
also encourages employees to acquire a part of the capital 
stock. Any employee may obtain a share of the common 
stock upon the following terms : $10 at the time of appli- 
cation, the balance in installments of not less than $5 each. 
Upon this balance he must pay interest at the rate of 4 per 
cent, per annum. In the meantime all dividends declared 
upon the stock accrue to the purchaser. But the certifi- 
cate of stock is held by the secretary of the company as 
trustee for the subscriber until the final payment is made. 
There have been up to date about seventy or eighty shares 
taken by the employees, nearly all of which were purchased 
at prices varying from $100 to $128. The company has 
under consideration a plan to go one step farther, and 
guarantee the employees who hold stock against loss upon 
their investment. They find a good many difficulties in 
the way of the practical working of such a guaranty, but 
hope to make it a permanent part of their system. 

Another important feature of the Ivorydale system is 
the pension fund, inaugurated for the benefit of the em- 
ployees. This fund is created by setting aside the sum 
of $500 semi-annually, half of which amount is taken from 
each profit-sharing dividend and one-half is paid by the 



ECONOMICS. 209 

Proctor & Gamble Company. The management of the 
fund is in charge of a board of trustees composed of em- 
ployees and members of the company. A pension is 
granted to any employee who has been in the continuous 
employment of the company for not less than seven years 
when partial or total disability to work has been caused by 
sickness, accident, or old age ; and it is the company's in- 
tention so far as possible to provide those who are entitled 
to pensions with such work as they can readily perform, 
at such wages as the work is worth. The introduction 
of the pension fund is of recent date, but on January J, 
1895, there was $2,000 in the fund, with one pensioner 
upon the rolls. 

One other economic condition is found in the building 
and loan associations, which have enabled a few to build 
their own homes, and this is encouraged by the company. 

The attempt to improve the social life of the employees 
has met with less success. Although library, reading- 
room and card-room have been provided free, they have 
not met with the success anticipated when inaugurated. 
This is doubtless- owing to the many mutual-aid clubs, 
which furnish greater attractions than the reading-room 
and the library. In seeking enjoyment laborers have a 
tendency to scatter into other groups, rather than to asso- 
ciate among themselves in a single group ; also, the Avidely 
separated position of the homes renders compact grouping 
almost impossible, as about one-half live near Ivorydale 
and the rest live in the city of Cincinnati. 

When an employee is injured or sick, the physician 
employed by the company cares for him. The company 
also continues the wages of the injured employee through 
—14 



210 



ECONOMICS. 



the period of his disability, and seeks to emphasize the 
fact that employer and employee are associated for a com- 
mon interest. Many methods are taken by the managers 
to show their interest in the employees. Thus, on Christ- 
mas day, 1893, three hundred turkeys were distributed 
among the heads of families. And after each semi-annual 
pay-day, in January and July, a day is set apart for a gen- 
eral celebration, in which employers and employees engage. 
The day is taken up with games, sports, and general jollifi- 
cation. 

The entire profit-sharing enterprise is established on 
a business basis. Although altruistic motives may have 
been at the foundation of this scheme, it was originated 
for the improvement of the business with the belief that 
the benefit of the employee was in the end to be for the 
benefit of the employers. Most of the laborers being un- 
skilled at this time and below the average intelligence of 
skilled workmen, it was difficult to persuade them it was 
not a scheme to get more work out of them for a corre- 
sponding equ-ivalent. Also, they were disposed to take 
the dividend as a matter of course and spend it freely 
and sometimes foolishly. But time and experience have 
dispelled this idea. The success of profit-sharing there, 
as elsewhere, is a matter of education, and many ef- 
forts of profit-sharing have failed elsewhere simply be- 
cause the employers failed to remember that the em- 
ployees must be educated up to it. Patience as well as 
justice is required for success. During the first two 
years the profit-sharing was not a success as a money- 
making investment, but as the men became more and more 
convinced that they were treated with justice they became 
more and more careful and more intelligent in the work, 



ECONOMICS. 



SU 



until it is plainly demonstrated and freely admitted that 
the saving is much in excess of the sums paid to wage- 
earners as profits. 

The success of the plan has exceeded the expectations 
of the company. The gain is in the saving of time, in 
the diminishing of material, in making a better quality 
of wares, in keeping men of experience, and finally, a 
saving of oversight. These are the principles which have 
been maintained by the advocates of profit-sharing, and 
it is gratifying to find that they agree with the experience 
of those who have carried it out. There have been no 
strikes or labor troubles of any kind at these works since 
this plan has been in force. Employees remain longer 
in the service of the company, and it is very seldom that 
a man is discharged on account of lack of work. It 
demonstrates that the interests of the employer and em- 
ployee are the same, and any warfare between the two 
classes is an unnatural warfare and works against the 
interests of both parties engaged in it. 

Another very important example of profit-sharing is 
furnished by the ^N". O. E'elson Manufacturing Company^ 
a corporation for the manufacture and sale of plumbing 
goods, steam goods, and machinery. The firm was first 
established in 1877, incorporated in 1883, and began 
profit-sharing in 1886. Its factories are in St. Louis, 
Missouri, Mound City, Illinois, and Laclair, Illinois. The 
number of employees varies from 400 to 500, and the 
wages range from $1.25 to $1.50 per day for common 
labor, and from $2 to $2.50 per day for skilled mechanics. 
The company runs full time, with the possible reduction 
to three-fourths time for perhaps a month in midwinter. 



212 ECONOMICS. 

About one-half of tlie company's works are located at 
Laclair. Here the factories are well built, heated with 
steam and lighted with electricity. The company owns 
125 acres of land, 15 of which are reserved for factory 
uses and 110 for residence purposes. There is no attempt 
to build a model town, as there are no models for houses 
or modes of action for people. It was held that in every 
respect life should be as free from restraint as on a farm. 
But the streets are well laid out. They are paved with 
cinders and sprinkled in dry weather. Plank sidewalks 
prevail where needed, and shade trees have been planted 
on all the streets. Water and street lights extend wher- 
ever there are dwellings. 

The company has made it possible for employees to 
purchase land at a very low rate and build their own 
homes, paying for them in monthly payments. Should 
a person desire to move from the town, the company 
takes the property from him without his loss. 

The plan of profit-sharing adopted varies somewhat 
from that of the example just given. It sets aside one- 
tenth of the profits for a reserve fund, one-tenth for a 
provident fund, and one-twentieth for an educational 
fund; the remainder is divided equally between em- 
ployers and employees. The reserve fund was set apart 
to meet the loss of a bad year, and to equalize dividends 
when profits were small. The provident fund was created 
to take care of the sick and disabled and the families of 
deceased laborers. This latter fund is in the hands of a 
committee of five of the employees, elected by the em- 
ployees themselves. Special rules are made for the con- 
trol of the expenditure of this fund, so as to meet all 



ECONOMICS. 



213 



the requirements of the capitalist. There are no conditions 
attached to employment and profit-sharing except a man's 
capacity for work. There are no agreements respecting 
unions, time of service, nor the manner of quitting. 
Finally, the manner of division was modified so as to 
yield 2 per cent, on wages to every one per cent, on capital, 
and the earlier practice of setting aside 10 per cent, for 
provident fund and 5 per cent, for educational fund was 
displaced by paying out whatever was necessary for these 
funds and charging the same to gross profits. 

The results of the first year's business after profit- 
sharing was adopted gave a dividend of 5 per cent, on 
wages ; second year, 10 per cent. ; third year, 10 per cent. ; 
fourth year, 8 per 6ent. ; fifth year, 10 per cent. ; sixth 
year, 8 per cent. ; seventh year, 4 per cent. ; and in the 
eighth year, which was 1893, no dividend was declared. 
The total dividends paid to wage-earners as their share 
of divided profits has been $65,000, or an average of 9 
per cent, on wages paid. In the beginning, dividends 
were payable in cash or the stock of the company; but 
in recent years, in order to make a solidarity between 
caj)ital and labor, the company insists that all dividends 
shall be paid in the stock of the company. Perhaps 
there is no other feature that binds the employees and 
employers so closely together as a participation in divi- 
dends and sharing in the profits of the concern. 

One other economic condition here is worthy of especial 
attention: this is the cooperative store, which was opened 
in May, 1892, and incorporated under the laws of Illinois 
for the purpose of furnishing consumers with goods at 
moderate rates. The laws under which it is incorporated 



214 



ECONOMICS. 



provide, among other things, that no one shall hold more 
than one share or cast more than one vote, and that all 
profits above interest shall be divided among members. 
The capital stock is two thousand shares of $50 each. 
The business consists in buying and selling any class of 
goods required by members, and manufacturing. It is 
under the control of a board of directors, elected annually 
by the members. All business is conducted on a cash basis. 
All goods are retailed to members or non-members at the 
ruling prices as indicated by the actual prices prevail- 
ing in stores in the vicinity. At the end of each quarter 
the books are balanced and dividends declared according 
to the recommendation of the directors and the approval 
of the stockholders, in proportion to the amount of the 
purchases of each individual during the quarter. Only 
half-rate dividends are given to non-members. The divi- 
dends have varied from 10 per cent, to 20 per cent., except 
in one quarter when there was no profit at all. The 
business is carried on entirely upon an economic basis. 

Some attempts have been made to improve the social 
condition of the laborers. There are free billiard-rooms 
and bowling-alleys, a small grove where swings and 
benches are provided, and a baseball ground. The com- 
pany maintains a landscape gardener, and keeps a green- 
house from which residents are supplied free of charge 
with as many flowers as they wish to set out and care for. 
A well-organized literary society is in existence, where 
occasional lectures by distinguished men are given. There 
is a well-trained band which gives open-air concerts during 
the week on the grounds adjoining the club-house. A 
library containing about 600 carefully selected books is 



ECONOMICS. 216 

free to all. A large number of the readers reside outside 
of Laclair. There are provided also a kindergarten and 
public schools. In the school, students are admitted on 
part time and allowed to work in the shops or on the farm 
during a portion of the day, for which they receive com- 
pensation. 

As to the results of the entire system as practiced bj 
the ]Sr. O. iSTelson Company, it is the opinion of the man- 
agers that the waste of time and material has been greatly 
reduced; that there has been a better attention to busi- 
ness; and that there has been established a solidarity 
of employer and employee in a common business in which 
they are mutually interested, from which they draw mutual 
profits. 

The brief statistical presentation of these examples of 
attempts to solve the labor problem reveals to us the funda- 
mental proposition in the jDrocess of its solution, namely, 
that as interests of capital and labor, of employer and 
employee, are common and all warfare between them is 
unnatural, any system which will tend to establish this 
fact will have within itself the basis of success, and any 
system which fails to establish this certainly will not 
succeed. There must be established a solidarity of in- 
terests of employer and employee upon an economic basis. 
There must be established a feeling that their interests 
are common. Having established this, and acting upon 
it on the basis of absolute justice, any rational plan has 
the probability of success. If this be continued further 
in the social life, so that the employer and employees 
mingle together on a common basis, the barriers now exist- 
ing between the classes will be broken down and there 



216 ECONOMICS. 

will be a common sympathy and trust between them. 
From the foregoing examples we may infer that a success- 
ful solution of the problem rests upon the observance of 
the following principles : 

1. The laborer must have an economic interest in the 
product of his own industry to insure care of tools, saving 
of time, saving of material, and the creation of a better 
quality of goods. 

2. He should be received into total or partial partner- 
ship in the management of the business through stock 
ownership or some similar means. 

3. Both employees and employers should cooperate in 
furnishing means of social improvement. 

4. While working together the utmost sympathy should 
prevail between the employer and the employee, and at 
the same time due respect should be given to the respective 
position and rights of each class. 

5. In order to bring about the above conditions the 
employers must cease to combine against the interests 
of laborers and the latter must cease to combine against 
the former. 

6. To gain the confidence of the public in all efforts 
to their own improvement, laborers must cease to militate 
against members of their own class, and recognize the 
rights of all men to work for wages according to their 
own choice. 

7. And finally, it may be said, to accomplish the above 
there must be a constant education of both employers and 
employees concerning the rights, duties and limitations of 
each class and the mutual interests of each class as if 
no class distinction existed either on an economic or social 



ECONOMICS. 217 

basis. And this leads to consideration of individual char- 
acter as causation in social improvement. 

References: Gilman, N. P., Profit-Sharing; Shaw, Albert, 
Cooperation of a Western City; Warner, Amos G., Three Phases 
of Cooperation in the West. 



218 ECONOMICS. 



CHAPTER VII. 

LABOE ORGANIZATIONS. 

Origin of Labor Organizations. 

A reference to the origin and liistorj of labor organi- 
zations will show that they have had a natural and essen- 
tial development. Just as we have the development of 
government itself or the natural process of the evolu- 
tion of corporations or of other social or economic organi- 
zations, so we find in the present existence of labor organi- 
zations the natural outcome of the economic conditions of 
the world during the past two centuries. 

The American Trade Union has a representative, in 
idea at least, in the ancient guild. The citizens of the 
towns in the Middle Ages formed themselves into guilds 
in order to defend themselves against the attacks of law- 
less barons of the country. The whole body of citizens 
were united against the robber outlaws who sought to 
exact from them all the taxes and fines which they could 
take by means of persuasion or coercion. But as soon 
as the town guild had obtained its independence, it was 
ruled by a body of noblemen, who in turn concluded that 
they were the town, and opposed all of the common trades- 
men and craftsmen by their arbitrary and high-handed 
procedure. Then history repeated itself in the picture of 
the man who struggled to free himself from his oppress- 
ors, as these oppressed craftsmen now formed themselves 



ECONOMICS. 



219 



into guilds and governed the towns themselves for many 
generations. 

These craft guilds represented the union of all trades- 
men of a single craft in one organization. Each guild 
included masters, apprentices, and laborers. There was 
no division here between masters and workmen; they 
were all of one body and their interests were common. In 
this early time, very little capital was necessary for pro- 
duction, and the distinction between the capitalistic em- 
ployer and hired labor scarcely existed. Each craftsman^ 
with what little capital he commanded, worked wdth his 
own hands alongside of his apprentices and laborers. The 
servants were generally hired by the year, and the appren- 
tices were bound by the year ; so it was to the master's 
interest to keep everybody at work whether there was a 
demand for goods or not. So he did not wait for orders 
to come in, but kept manufacturing and placing the goods 
upon shelves as a stock in trade. The apprentices, after 
having learned the trade, frequently left their master and 
started up a new manufactory for themselves. Living 
this quiet, unassuming, peaceful life, the craft guilds were 
united in an association which tended to establish honesty 
of work and brotherly kindness ; to defend the oppressed 
and to relieve the distress of the less fortunate. 

As time went on, complexity of trade increased, more 
capital was required in production, and the craftsman now 
became the capitalistic master; for besides his servants 
and apprentices and members of his own family, he hired 
laborers or journeymen who worked for wages. In this 
situation, it became a question to be settled partly by the 
state and partly by the craft guild as to how many ap- 



220 ECONOMICS. 

prentices a master might have, and also how many hired 
laborers he should have, what rate of wages he should pay 
them, and how many hours they should work. As wealth 
increased the masters ceased to work with their own hands, 
and their laborers became a distinct class by themselves. 
This change was brought about slowly, but surely, which 
separated the employer from the employee. This social 
separation of the emiDloyer and the employee was greatly 
facilitated by the discoveries and inventions occurring in 
the later half of the eighteenth century. These are 
epitomized as follows by Professor Marshall: 

"Between the years 1760 and 1770 Roebuck began to 
smelt iron by coal; Brindley connected the rising cities 
of manufactures with the sea by canal; Wedgwood dis- 
covered the way of making earthenware cheaply; and 
while Hargreaves invented the spinning- jenny, Arkwright 
utilized Wyatt's and High's inventions for spinning by 
rollers, and Watt invented the condensing steam engine. 
Crompton's mule and Cartwright's power loom came short- 
ly after. These inventions took manufacture away from 
houses and cottages and gave it to factories and large 
workshops. Armies of men came together under the man- 
agement of capitalist employers, and the modern wage 
question made its first appearance." 

It seems that many of these employers were harsh, 
overbearing, cruel men, and under the new conditions they 
cared little or nothing for the condition of the laborers 
imder them. It was not long before great factories requir- 
ing much capital were built, and there were congregated 
in them large bodies of workmen under a common over- 
seer. The work of separating the capitalist from the 
laboring class was completed; the struggles of the labor- 



ECONOMICS. 



221 



ers against the employers had now begun. And what- 
ever sympathy we may have for the modern laborer in 
his attempts to secure kind treatment and justice, what- 
ever pity we may have for his ignorance or misguided 
ambition, no one can read the history of the struggles of 
the laboring classes of this period without deploring the 
misery of their situation. The laborers were thrown into 
evil conditions for which they were not responsible ; with 
fourteen hours of labor in great factories with impure 
air and insufficient light, with poor wages and harsh treat- 
ment, they began to look around for some way of redress. 
And the first means which they took was the attempt 
to revive some old legislation respecting labor, and they 
urged the enforcement of two old laws passed two cen- 
turies before, which limited the number of hours of labor, 
the number of employees each master weaver might have, 
and held that the number of apprentices in a shop should 
not exceed by more than three the number of journeymen, 
and which reiterated the law that wages should be period- 
ically fixed by the justice of the peace. 

]^ow the first united efforts were for the purpose of 
petitioning Parliament to enforce these old laws. In this 
the laborers failed, and were convinced finally that they 
would look in vain to Parliament for redress of grievances. 
Then they began to form unions of their own, uniting 
in sympathy, mutual aid, and common defense against 
their employers. At first there were many laws passed 
against their assemblage for the purpose of labor agitation; 
laws making it a misdemeanor for a person to refuse to 
work when wages were offered him, thus precluding the 
right to strike. Is it any wonder that, born in those 



222 



ECONOMICS. 



troublesome times, the unions became harsh and bigoted 
and narrow-minded in their conception of their own 
interests ? The laws, indeed, ''had made a crime of what 
was no crime" — the crime to refuse to work in order to 
obtain higher wages. Thej knew that this law, and all 
laws respecting labor, were full of class injustice, and 
many of them being rude, ignorant men, they were in turn 
unjust, and as fast as power came to them were ready 
to be unfair. If we glance at the unions of to-day we find 
a great contrast between the leaders of these old unions 
in their bigoted, narrow, and cruel lives, and leaders of 
the modern union; and the rank and file of to-day is 
far in advance of the rank and file of the ancient union. 
!N^evertheless, to-day we find at times a spirit of the same 
harsh, narrow, bigoted, and short-sighted life, — the folly^ 
ignorance, and selfishness cropping out in the modern 
union. But this is usually in the smaller unions, belong- 
ing to the weaker part of the organization, and are con- 
ditions which are greatly deplored by the intelligent 
laborers and liberal leaders, conditions which are rap- 
idly changing as intelligence increases among laborers. 

Development of Trade Unions. 

From this time on, trade-unionism developed steadily 
in England, but not rapidly, until the year 1830, when, 
all restrictions being removed, unions sprang into being 
at once and as necessary organizations. It appears from 
this view of the early origin of trade-unionism, that it 
was a natural development, and that the capitalistic class 
on one hand is as responsible for its existence as the 
laborers on the other. It is an expression of the natural 



ECONOMICS. 



223 



right that must hold everywhere, to organize for the 
sake of self-protection; just as the organization of capi- 
tal in production was a normal process of economic evolu- 
tion, so was that of the organization of labor. In reality, 
the employers of labor are not more responsible for the 
condition of labor than are laborers for the condition of 
employers, except that capital took the initiative in or- 
ganization. 

After trade unions had been established, the next step 
in their development was the formation of amalgamated 
associations. There sprang up in England and America 
a tendency to unite, in federal assembly, all the principal 
unions for a common cause. This has been going on 
rapidly, and there has been in the past thirty years a 
strong movement to make one solid organization through- 
out Europe and America. On the one hand, the Knights 
of Labor have stood for this organization on the basis of 
uniting all unions and assemblies in one great body, upon 
a political basis for power, not only at the polls, but else- 
where, that they might force all opposition to yield to the 
demands of labor. On the other hand, there is a great 
American Federation of Labor, which desires to federate 
trade unions and to leave each one in possession of its 
own local affairs, yielding to local government. There 
has been a little friction in the past between these two 
great organizations, the former standing for imperialism, 
the schedule of government absolute in nature, and the 
other standing for local self-government of each trade 
assembly. There has also been an amalgamation of all 
unions in the same branch of industry throughout the 



224 ECOXOMICS. 

United States, siTch as the International Typographical 
Union, which was instituted in 1850. 

In the United States the first trade union was formed 
by the tailors in ISTew York, in 1806. But labor agitations 
continued in New York at intervals, only a few unions 
being formed down to the year 1830. From that time 
on until 1851, we find a great labor movement and the 
constant development of unions of different kinds. This 
received a strong impulse by a meeting of farmers and 
mechanics and other workmen in Boston in 1831. During 
this period mentioned there were numerous strikes by the 
various unions, and strenuous efforts were made to reduce 
the hours of labor. In July, 1833, the workmen of the 
Thompsonville carpet factory struck for an advance in 
wages, and the carpet company sued some of the strikers 
for conspiracy. In the trial by jury which followed, a 
verdict was given for the laborers. This had a tendency 
to encourage strikes. Then followed a long struggle by 
the trade unions for the right to exist. The matter was 
finally decided in their favor, and victory was achieved. 
A second industrial congress convened in I^^ew York on 
June 10, 1847, received a wide representation, and organ- 
ized labor was recognized as an institution of great power 
and entitled to a position in the industrial world. 

But while this period of which I am speaking was the 
time in which organizations were struggling for rights^ 
the great time for organization and progress in America 
began in 1861, and has continued without cessation to 
the present time. ]^ow, nearly every trade in America 
is organized, and there are large numbers of amalgamated 



ECONOMICS. 



225 



associations besides the American Federation and the 
Knights of Labor. 

During the snmmer of 1894, the American Railway 
Union, nnder the leadership of Eugene V. Debs, came into 
prominence. Its purpose was to organize all railway em- 
ployees into one body and to precipitate a general strike, 
thus blocking the wheels of industry from the Atlantic to 
the Pacific. How nearly the plan succeeded we are all 
aware. The failure of this for a time gave less hope to 
labor leaders in the efficacy of the strike as a means of 
improving the condition of labor. 

Knights of Labor. 

In addition to what has already been stated, the Knights 
of Labor are an organization of employees both skilled 
and unskilled, and regardless of any trade or occupation. 
The aim is to break down the barrier between the dif- 
ferent occupations and local unions. They have taken a 
broader view of the social organization of labor, and thus 
have included not only all classes of laborers in their 
membership, but also employers and professional men. 
Their prime object is not that of warfare alone, but a 
complete organization of all the productive forces of in- 
dustry. They hope, by showing the relations of labor and 
capital and their mutual benefits, to demonstrate that there 
is a necessary union of the two in practical work; but 
they also claim in this union the rights and privileges 
of the laboring class. They have, besides a general 
national organization, a series of district assemblies, in 
which a considerable number of trades have been united 
in a common federative group. The Knights of Labor 

-15 



226 ECONOMICS. 

at times show great strength, and again are weakened by 
strife and contention. In fact, all labor organizations 
advance and recede in their movements with the condi- 
tion of the times, certain conditions being more favor- 
able to their development than others. 

The federation of the trade unions, on the other hand, 
has been at enmity with the Knights of Labor for several 
years, the trade unions representing the local fighting units 
of organized labor and always contending for their indi- 
vidual rights. Consequently, the Knights of Labor in 
their attempts to break down all class distinction find 
themselves in direct opposition to the practices of local 
assemblies. 

There has been an attempt to organize all laborers into 
one great mass, not only as a national organization but also 
as international, so that when a strike is declared it shall 
be for the whole world, and industry will be stopped until 
terms are made with organized labor. LTp to the present 
this seems to be an impossibility, yet we do see a growing 
tendency that way; but that growing tendency is also 
tempered with a conservatism, on the other hand, which 
would prevent any such radical movement. Should it 
ever come to a test of this kind, the so-called employer, 
or capitalistic class, could endure a strike longer than 
the employees themselves. Tor indeed at present, when 
one branch of labor is striking, it can be supported by 
another that is earning wages. In Australia at one time 
nearly all laborers were organized, so that industry was 
practically stopped. Yet the laborers were finally obliged 
to yield, although with certain gains. 



ECONOMICS. 



227 



Objects of Trade Unions. 

The first and fundamental principle of trade unions is 
to insure a just recompense to labor in the form of higher 
wages or shorter hours. The larger proportion of strikes 
that have taken place have been for either higher wages 
or shorter hours. The unions also have a large work to 
do in protection and assistance of needy fellow-laborers. 
This has become one of their fundamental laws. The 
third object is the improvement of the social conditions of 
the wage-earner by education and other means. In the 
modern trade union or general labor organization these 
are the fundamental points to be gained. 

But it must be admitted that in many of their attempts 
the unions have failed, as do all organizations. Indeed, 
the state in which we live is sometimes imperfect and 
has some faults, and the church in which we believe has 
still its defects; and so, when people censure labor or- 
ganizations, they forget that these new organizations, 
which have sprung up according to natural economic laws, 
are also dependent upon the same vagaries of human na- 
ture and imperfections of human government as are 
other organizations, and, indeed, that ignorance, selfish- 
ness, and obtuseness have a tendency to make all organi- 
zations imperfect, and frequently unjust. iN^evertheless, a 
large number of those who have opposed labor organiza- 
tions have failed to consider their natural reason to be, and 
their real beneficial effects. It is true, there were many 
reasons for attacking the unions in their early days, but 
the sensible way is to recognize their helpful principles 
and to combat their abuses as we do those of the church, 
the state, and the political party. 



228 ECONOMICS. 

Thorold Rodgers, in liis work on wages, in speaking of 
labor organizations, says : "A long study of the history 
of labor has convinced me that they are not only the best 
friends of workmen, but the best assistance for employer 
and the j)ublic, and to the institution of these associations 
political economists and statesmen must look for the solu- 
tion of many of the most pressing and difficult problems 
of our times." This is rather a hopeful view of the 
question. ISTevertheless, it is being verified to a certain 
extent in the fact that employers at large are recognizing 
union men, and as a rule prefer union men to non-union. 

But first, and above all, the trade unions have increased 
the intelligence of the laborers. The bare fact of their 
meeting together and discussing the questions of the day, 
the building of libraries, the listening to speeches, and the 
publication of newspapers devoted to laboring interests, — 
all of these things have a tendency to give increased in- 
telligence to the laborer. But it may be added that where 
this increased intelligence comes there is an elevated 
standard of life which commands an increase of wages. 
Of course this education and the elevation of the standard 
of life is also influenced by a limitation of numbers in 
a single trade, and were it not for other things this limita- 
tion in one trade would simply overcrowd other trades. 
But this increased intelligence leads to the prudential 
virtues, and a tendency to limit population and 'to main- 
tain a just balance between the laborers themselves and 
the means of development. 

Yet another field in which labor organizations have done 
a great work is that of temperance, for nearly all labor 
organizations are in themselves temperance societies, and, 



ECONOMICS. ^29 

indeed, many of their officers are total abstainers. Any- 
one acquainted with labor nnions can see what a vast 
advantage has been gained in this respect. They have 
improved the quality of labor by means of temperance^ 
and intelligence and skill have more rapidly developed. 

The unions have also greatly improved the social con- 
dition of laborers. Auj^one can go into a laborer's home 
to-day and see there the many comforts of life. There are 
family associations of an elevated, nature and of a pure 
and genuine character. One will be forced to admit that 
there has been a wonderful imj)rovement in the common 
laborer since the labor organizations sprang up. While 
not all of his progress is due to organization, much of it 
would have been lost had he stood alone against the mo- 
mentum of capital. 

Besides the foregoing, the labor organizations have been 
compelled to cope with the arbitrary usage of the employer, 
or capitalistic class, and have done something to gain those 
rights which belong to them. They have maintained wages 
by the force of strikes, if not always in a direct at least in 
an indirect way. 

Mistakes of Unionism. 

Yet in spite of these many good qualities, the labor 
organizations all represent many weaknesses. Their aim 
may be industrial peace, but they are all prepared for war. 
The strike is their means of warfare; and it is greatly 
to be deplored that it sometimes seems necessary, just 
as all war is to be deplored, though sometimes necessary. 
Strikes as a rule are unfortunate affairs, and in nearly 
every case, unjust affairs, on account of either one party or 
the other. Yet it is true that they have revealed some- 



230 ECONOMICS. 

what the condition of labor to the people at large, and 
have a vast educative influence on the employer, the 
employee, and the lookers-on. It is to be dej^lored that 
the real ultimate power of the labor organization rests 
upon the strike ; and yet in this case we must not be harsh 
with them, for, indeed, it not infrequently happens that 
though they appear as the aggressors in certain labor move- 
ments, the employers themselves have been the real cause 
of bringing them on. 

It must also be said against them, too, that they have 
been partial monopolies, with the intention of being com- 
plete monopolies as soon as possible. We deplore the in- 
justice and abuse of combined capital, especially in the 
form of trusts, which tend to limit the food-supply of 
people and thus to cause hunger and want and distress ; or 
the combination of coal companies in the time of winter, 
which causes poor people to suffer from cold in their rude 
apartments and leads to disease, pauperism, and crime. 
At the same time we must consider the same principle on 
the part of the laborers who organize strikes unjustly for 
the purpose of making a shortage in labor, and thus to 
depress and destroy industries. It is the abuse of monopoly 
of labor as the abuse of monopoly of capital that is the 
evil. In themselves they may both be tiirned to good. 
Each is to be put in the same category of good or evil, of 
justice or injustice. And right here it may be stated, 
that, failing to organize all laborers into a class, they turn 
as enemies against the non-union men, or "scabs," as they 
are called, denying them the privilege to earn bread to keep 
their families from starving, and thus show an injustice 
and short-sightedness that is un-American and belongs to 



ECONOAIICS. 231 

the times of medieval barbarism. In this way they hope 
to monopolize labor by controlling all labor within a given 
field of operation. Their object is not an increased produc- 
tion, but a question of distribution, or of directing a 
larger supply of distributed goods to their own class. 

More than this, in seeking the exclusive interest of class 
they are in danger of losing interest in the reforms which 
tend to benefit common humanity, and in this they are 
short-sighted and conservative, clinging to old ideas in- 
stead of accepting new ones. They fight the introduction 
of new methods that tend to facilitate the production of 
economic goods and to benefit general humanity. In other 
words, in attempting to gain an immediate benefit, they 
bring about an ultimate evil to society. 

There are minor evils of trade unions, such as an inter- 
ference with the apprentice system. They have discour- 
aged apprentices to a large extent, and limited the number 
that may be taken by an employer. In this the trade 
unions have, in a measure, helped to break down the old 
apprentice system. It is difiicult for a man who desires 
to learn a trade to have any opportunity, unless he joins 
a union and learns under its direction. To a large extent 
this is to be deplored. 

There are minimum rates of wages, and all laborers 
must come within the boundaries of these fixed rates as 
agreed upon by union men. There is a tendency to level 
down, to suppress that individual effort which permits a 
man to rise above his fellows. Without intending it so, 
this leveling down is to the detriment of that which has 
been a means of the elevation of the English race, namely, 
individual responsibility. If a member of a union at any 



232 ECONOMICS. 

time does a little too muck work, or is zealous to jDlease 
his employer, they call him a bad name and say "he wants 
to rise above us," and then they turn his action into ridi- 
cule. This has a tendency to supjDress honest, individual 
effort to rise above all surroundings, and without so desir- 
ing it the union has a tendency to produce a dead level in 
society, discouraging progress. While the general result 
is that of advancement in the trade imions, in this respect 
it is non-progressive. 

The right to strike cannot be denied labor organiza- 
tions, any more than the right to organize, except it be 
the cause of a great injustice to a large number of indi- 
viduals of a community. But the trade unions have 
greatly abused this power to strike; they have been inju- 
dicious, sometimes urged on by scheming leaders who 
have sought for prominence in the union, but more fre- 
quently urged on by the opinions of ignorant, stupid men, 
who have talked over their grievances until they have 
made mountains out of mole-hills. I may say in this 
respect about injudicious leaders, that there is as much 
demagoguery and ambition for power within labor or- 
ganizations, in proportion to the numbers, as in any po- 
litical party in the United States. Human nature is the 
same here as elsewhere. Whereas the right to organize 
may be claimed by any body of people in our free coun- 
try, and the right to strike for higher wages may also be 
accorded in a general way, nevertheless, it is true that 
this same position may be taken and held unjustly. 
Though the law may or may not decide in this way, it 
is the common opinion that no small body of men has a 
right under any circumstances to discommode the whole 



ECONOMICS. 



23S 



economic world from the Atlantic to the Pacific without 
being arraigned for injustice, by the common opinion 
of right-thinking people. 

Besult of Strikes. 

We come to that important question, the results of 
strikes. Are strikes beneficial or detrimental to the inter- 
ests of laborers ? If we sum up the immediate gains 
in most strikes, by the increase in wages, and on the 
other hand take the losses incurred on account of time 
and expense to the laborers, it can be claimed that the 
larger majority of strikes are failures. And if we add to 
this the inconvenience caused to the community, the dis- 
organization of trade, the loss to capital, it may be said 
directly that strikes fail. But if we consider the indirect 
influences, keeping up a common sentiment of higher 
wages, why, then possibly the victory has been with the 
labor movement; for in no other way can we account for 
the great general improvement in the labor community 
and the increase of wages. 

It will be seen by looking over a list of the strikes that 
occurred during a period from January 1, 1881, to June 
30th, 1894, that where strikes were just and laborers re- 
sponsible for their demands, they usually succeeded. But 
where they were unjust and unreasonable, and where, 
despite all that which legitimately fell to them, they tried 
to manage the employer's business, we may say they 
failed. During this period the total number of establish- 
ments striking were 69,102. Of these, 21,580 were for 
the increase of wages; 10,543 for reduction of hours; 
and 5,564 against reduction of wages; and for both in- 



234 ECONOMICS. 

crease of wages and reduction of hours, 4,Y87. These are 
the four chief causes of strikes, although strikes for sym- 
pathy and for recognition of the unions are increasing. 
Of the total number of strikes, 44.49 per cent, are re- 
ported as successful; 11.25 per cent, as partially success- 
ful; and 44.23 per cent, as failures. During this period 
3,712,561 men were thrown out of employment on ac- 
count of strikes; of these, 2,061,259 were on account of 
unsuccessful strikes. The loss in wages to employees was 
$163,807,657, and on account of lockouts for the same 
period, $26,685,516, or a total loss to employees of the 
enormous sum of $140,493,173. The loss to employers 
for the same period on account of strikes and lockouts was 
$44,825,237. A large proportion of failures have been 
on account of the demands for change of time for begin- 
ning work, discharge of employees and foremen, discharge 
of non-union men, against the employment of non-union 
men, and for the reduction of the hours of labor, and so 
on; while the large proportion of successes have been for 
an increase of wages and a reduction of hours. 

There seems to be a tendency for labor unions to be 
more and more conservative in respect to striking. They 
are learning by degrees what they may accomplish and 
what they may not, and while occasionally we see a dis- 
orderly strike in which there is no real cause or occasion^ 
we more frequently see one that is advocated on account 
of some special grievance. A large proportion of the 
officers and leaders continually counciling infrequency of 
strikes, shows that there is a tendency, as intelligence in- 
creases, for people to be conservative. They recognize 
that there are limits to what they may do. 



ECONOMICS. 235 

Influence of Trade Unions on Wages. 
In discussing the laws of wages there are fixed what 
are called a superior and an inferior limit. The inferior 
limit represents the lowest grade of wages, below which 
labor cannot perform the services demanded ; the superior 
limit represents a point above which, if wages rise, there 
will be no employment, and a large number of laborers 
thrown upon the market will tend to decrease wages. Of 
course it is well known that the rate of wages depends 
largely upon the law of supply and demand, but trade 
unions attempt to diminish the supply of regular laborers. 
This is one of the main points of the strike, viz. : to walk 
out and leave the employer without help. They attempt 
to fight one monopoly by creating another. Labor is not 
perfectly mobile; it combines in groups, one group with 
another group, and cannot be sufficiently detached for gen- 
eral competition. The result is that the unions can make 
a shortage in any given industry, and thus raise wages by 
destroying the equilibrium of supplj' and demand in any 
given occupation. But the plentifulness of labor in all 
occupations has been detrimental to their highest success 
in this respect. They also fail in another way. If the 
coal miners strike for higher wages and thus enhance the 
price of coal, members of other unions must pay a higher 
price for coal, greatly to their detriment. Again, if rail- 
road men strike, and thus hinder the delivery of raw ma- 
terials or machinery that would employ another class, 
they too are thrown out of employment, and the result 
is that one part of the laboring community works against 
the interests of the other part. Upon this principle there 
is a general desire to make all labor one solid organiza- 



236 



ECONOMICS. 



tion. But, owing to diversity of interests, wliich must 
first be overcome, this is a difficult matter. However, 
wages may be increased by the general operations of labor 
organizations. 

What do the laborers demand ? They say, "We must 
have a larger share of the product of industry;" that, 
"As much can be produced in one hour now as in a day 
formerly, but wages are not increased. We get little 
benefit of the increased facility of production." This 
is only a partial truth. The rate of wages is increasing, 
but not in proportion to the increased rapidity of produc- 
tion. Yet there is a limit to what a laborer may get. 
And the operations of trade unions cannot force wages 
above a certain limit determined by the conditions of 
industry and labor. The laws of wages forbid this. 

Effectiveness of Labor Organization. 

Perhaps the economic services of labor organizations 
are best seen in the attempt to raise the standard of life 
and to create a temporary monopoly, at least, for the 
supply of labor. In modern times they have sought to 
induce people to use only things with union labels upon 
them, which are supposed to guarantee that they are made 
under the conditions of a high standard of life and well- 
paid labor. This has had a certain influence in producing 
a certain grade of goods and in preventing the use of sweat- 
made garments. In this respect they have had a stronger 
influence than the consumers' league or any other agency 
for the purpose of encouraging well-paid labor. 

It is quite interesting to notice the growing power and 
influence of labor organizations. In England they are 
working on the basis of productive and distributive co- 



ECONOMICS. 



90- 



Operation and the proper protection of laborers. The 
strike as a means of warfare is gradually dying out in 
England, although occasionally it breaks out with unpre- 
cedented fury, largely with the class of laborers who are 
less skilled and have not yet obtained their independence 
by right living. In America the strike has not yet been 
abandoned, but in most instances it occurs among the 
more ignorant laborers. It is still, however, a powerful 
weapon in the settlement of the grievances of laboring 
people. "S^^erever the demands of laborers have been 
rational they have in most instances succeeded, because 
they have had the support of the press and to a large 
extent that of the people. For every one who is interested 
in the welfare of the republic wishes to see a well-paid, 
industrious, intelligent, prosperous and happy body of 

laborers. 

Arbitration and Conciliation. 

There is more and more a tendency to settle all labor 
difficulties by arbitration and conciliation. In the first 
place, they attempt to bring employer and employee to- 
gether on the basis of agreement. It would be good eco- 
nomics as well as good politics if there were a Board of 
Arbitration in every State of the Union, which would 
sit first as a Board of Conciliation, trying to bring em- 
ployer and employee together upon the basis of agree- 
ment; and second, if failing in this, to sit as a Board of 
Arbitration, with power to decide that if laborers do con- 
tinue to work it will be at a given wage within a limited 
time, and if employers go on with their business, they 
shall do so under the terms dictated. This is good politics, 
because two gi-oups of people in a free country have no 



238 



ECONOMICS. 



right to enter a quarrel which disturbs the peace and de- 
stroys the effect of the other men's toil, wasting their 
wealth and destroying business. It is good economics^ 
because every strike entails great losses both to employers 
and laborers. The employer's loss would be the margin 
ou goods, the laborer's in the form of wages. Under these,' 
circumstances a Board of Arbitration would so influence 
both parties that they would adjust themselves to the con- 
ditions. Long-time agreements would be made, and rather 
than pass to the State Board of Arbitration they would 
agree to settle all difficulties by a private Board of Arbi- 
tration made up of laborers and employers. 

There is at present a considerable discussion as to the 
relative desirability of compulsory and voluntary arbitra- 
tion. The former has been successfully tried in New 
Zealand and the latter in England. Should voluntary 
arbitration become sufficiently universal, it is better than 
compulsory. Yet the latter should be insisted upon when- 
ever the former fails to do its proper work ; and as stated, 
even in compulsory arbitration, voluntary agreements 
should be encouraged and compulsion used as a last 
resort. ^Nevertheless, arbitration of some sort, protect- 
ing the rights of both parties in the strife, is the most 
desirable and effective solution of the difficulty, because 
it is the normal process in the evolution of law and social 
order. 

References: "Webb, Sidney, History of Trades-Unionism ; Ely, 
E.T., Labor Movements in America; McNeil, The Labor Move- 
ment ; Howell, Conflict of Capital and Labor ; Wright, Carroll D., 
Strikes and Lockouts; Commons, J. R., Trade Unions and Labor 
Problems ; Pratt, E. A., Trade Unionism and British Industry. 



ECONOMICS. 



239 



CHAPTEE VIII. 

THE DOCTRINE OF SOCIALISM AND THE PRESENT 
ECONOMIC SYSTEM. 

The Claims of Socialism. 

The socialists find fault with the present economic sys- 
tem on account of the waste of competition in production 
and the injustice of distribution. Recognizing, as everj 
one does, the imperfections of the modern system of eco- 
nomics, they set forth in contrast an ideal system in which 
competition is destroyed and all economic society is ar- 
ranged in groups, either the state or smaller than the 
state^ which have complete control of industry. In this 
way they hope to abolish the wage system and all the 
evils attendant upon it, money and the difficulties of 
circulation. They would abolish trusts, for the state would 
become one great trust which would order the amount 
and kind of production, establish each one's share of the 
natural product, and regulate all industrial, social, and 
educational affairs. They hold that this ideal system 
might be established at once if the people would but re- 
solve to enter upon it. Believing in this system, they 
are opposed to the old method of political economy, and 
will listen to none of its teachings except those which ad- 
vance their system. 

Socialism has helped to point out the evils of modern 
economic society, and to that extent we recognize its serv- 
ices; but it has failed in providing an adequate remedy 



240 



ECONOMICS. 



for the evils that exist. In thus pointing out the evils of 
society and railing at the present constitution of things, 
they agree with the anarchists; but in their remedies 
these two groups of agitators disagree, for the anarchist 
desires no government, or the least possible, while the 
socialist desires the most possible. 

In order to explain fully the meaning of this ideal sys- 
tem, a brief sketch of the rise and progress of socialistic 
ideas will be given. 

The AdjuBtments of Social Order. 

Since man began to think at all about social life, re- 
formers have not been wanting who have set forth ideal 
systems of social order. These reformers, earnestly seek- 
ing the improvement of human society, have been of 
widely different character. There have been merely social 
writers, who have set forth a better standard of excellence 
in governmental affairs; there have been pure idealists, 
with impracticable plans; and genuine social reformers, 
who have devised and executed plans for the improvement 
of the race. The Jew, the Greek, the Roman, and the 
Teuton, each had an ideal system of government, and each 
separate nationality has had its ideal philosophers in mat- 
ters of social order. 

Moses was a reformer of the better class. He organized 
the Hebrews into a great commonwealth on the basis of jus- 
tice and equal rights. He talked very little about a repub- 
lic : he went to work and made one. He pointed out the 
duties of citizens to one another, and taught them right 
principles of association in public life. In fact, he took 
a rude and barbarous people, just out of the bonds of 



ECONOMICS. 241 

slavery, and created out of them a well-organized nation 
in which the rights of property were clearly defined and 
the protection of life and limb fully practiced. The sys- 
tem of government set forth by Moses was the greatest and 
most enlightened of all the systems of antiquity. Such 
was its force and influence that its best principles have 
come down to us, and are exhibited in the rights and privi- 
leges of a free people. 

Greek Ideal. 

In Greece, Lycurgus and Solon codified and improved 
the laws of their countrymen, and Aristotle wrote a book 
on civil polit}', setting forth the best ideal government of 
his day. He was a practical social philosopher. He wrote 
on various forms of social government and social order, 
pointing out that which was best and that which was 
worst in government. The politics of Aristotle represents 
to-day the most profound ideas of civil polity and social 
order ever conceived in any nation. 

But it remained for Plato to give to the world the first 
ideal system of politics based upon pure theory. In the 
full enthusiasm of youth, beholding the defects of the 
Grecian government, he wrote a book called the "Repub- 
lic," in which he pictured man as living in a state of social 
perfection, — a state entirely different from that which 
existed in Greece in Plato's time. While Aristotle had 
based all his assumptions on the actual, the real and the 
historical, Plato in his "Republic" failed to do justice to 
historical reality. The " Republic " is a book grandly 
original in conception and beautiful in execution, but it 
advocated principles of government that have never yet 
—16 



242 ECONOMICS. 

been realized, and indeed which seem impossible to 
realize until society has vastly changed its condition. 
Its author held that the chief end of man was to perform 
his duty within the state ; he was to be absorbed into the 
state. The highest good of man was sought in the sup- 
pression of the individual for the sake of social order. 

While Plato understood with the utmost clearness that 
the character of any state must depend upon the character 
of the individuals who compose it, and that a state would 
be no better than the citizens of which it is composed, 
yet in his desire to carry, out unity and symmetry under a 
particular system he ignored and suppressed the indi- 
vidual man. The picture which he presents to us is that 
of an ideal aristocracy, in which every part is complete 
and all its members laboring in harmonious contentment. 
There were some extravagant ideas of common property, 
common life, and community of family life; yet the 
prime object of the whole was to insure righteousness, 
justice, and morality. Without doubt Plato knew that 
his book presented an ideal plan, and that he never ex- 
pected to see a government such as he pictured in his 
"Republic" prevail in Greece until the character of Greek 
thought and Greek life had greatly changed from what 
it actually was in his time. 

Plato laid the foundation of modern socialism. Of the 
long line of idealists who have pictured to us what a per- 
fect government ought to be, Plato stands at the head. 
And the numberless philosophic dreamers that have fol- 
lowed, owe him a debt, for setting forth principles of 
ideal systems of government beyond which none of them 
have ever traversed very far. 



ECONOMICS. 



243 



Broman Practice. 
The Romans were a practical, stoical people, who dwelt 
not in visions and dreams nor ideal systems of govern- 
ment. They wrought out an empire through the strength 
of law and by force of arms. It was not until the church 
had added its strength and its life to the declining Roman 
Empire that we find developed theories concerning ideal 
governments. It was in the fifth century that St. Au- 
gustine wrote " The City of God," in which he compared 
the state and the declining empire of Rome with the ideal 
government of God. His ideal government was repre- 
sented by the Church of Christ. He held that the system 
of God which sjorang up and grew alongside the kingdoms 
of the earth was the ideal kingdom of this life, and that it 
would gradually draw all men to it on the basis of fra- 
ternity, equality, and righteousness. It was but the 
prophecy of the expansion of a system which had already 
been created and whose foundations had been deeply laid. 
For centuries, through the influence of these ideas set 
forth by St. Augustine, men have sought to find an ideal 
government under the management and organization of 
the Christian church. In this they were doomed to dis- 
appointment; but we may trace the origin of modern 
Christian socialism to the basis of this commonwealth 
advocated by St. Augustine. 

Thomas More. 

Next to Plato, the man who was most successful in rep- 
resenting an ideal system which had a great influence on 
the thought of his time and upon all Utopias since, was 
Sir Thomas More, who represented man as living in a 
perfect social state. Beholding the injustice and corrup- 



^44 ECONOMICS. 

tion of the government of England which had grown up 
under arbitrary power of kings and lords, he pictured an 
island government, different from that of England, in 
which peace, righteousness and absolute justice prevailed. 
This ideal nation numbered about three or four millions 
of people, living a simple life without private property. 
The officers, elected by the people, fixed the duration of 
labor, and settled what the labor should be. This disposed 
of the case of production. The question of the distribu- 
tion of goods was left untouched, because, as he states, 
in a nation where wealth was abundant and justice reigned 
no one would desire more than his share of the property. 
He said it is fear of want that makes injustice, and if this 
could be disposed of, then justice and righteousness would 
reign. In regard to the social life, he modified the insti- 
tution of marriage and the family very little. He held 
that the adoption of children would be largely practiced, 
in order to keep families all very nearly equal in size. 
If excessive increase of population occurred, it was to be 
dealt with by emigration. In this respect he went not so 
far as Plato, who taught that the state ought to take ex- 
clusive charge of the rearing of children upon a scientific 
basis, producing that kind which was most desirable in the 
community. This presentation of the ideal government 
by Sir Thomas More in his ^'Utopia" was a scathing 
criticism upon the English government of his time. It is 
hardly probable that More had any idea that his dream — 
this picture of what a government ought to be under a 
condition of perfect justice and righteousness in humanity 
— would ever be realized. It was one method of repre- 
senting the blackness and corruption of a wickedly and 



ECONOMICS. 



245 



weakly governed people. But it stands to-day in history 
as the representation of the first well-presented system 
of pure communism. It is only a step or two from the 
Utopia of Sir Thomas More at the beginning of the six- 
teenth century to the development of French socialism in 
the middle of the eighteenth century, but over two centu- 
ries of time rolled away, — centuries filled with changing 

events. 

Prevalence of Old Systems. 

In spite of the ideal systems of government, the nations 
of the earth continued with their old forms, some growing 
worse and others better. England developed a more en- 
lightened constitutional government, while France rushed 
headlong into imperialism. France soon became the type 
of imperial government in which the king claimed to be 
the state and assumed that all people existed for his sake. 
There finally arose in France a large number of philoso- 
phers who, dissatisfied with the existing order of things, 
quietly pointed out the defects of the government of the 
monarchy in France. But the kings and the nobles disre- 
garded the faint warnings of the philosophers, and re- 
garded not the cry of distress of the people. The worst 
features of ancient despotism had been revived. It gave 
neither sco^^e nor support of social life; it guaranteed 
no real freedom. The great mass of the people were 
regarded as serfs, to be ruled at the pleasure of the aris- 
tocracy. The old forms of the Church, of the middle 
class and of the peasantry, still remained, but they were 
without representation and without power. The edict of 
kings, set forth with arbitrary sway, controlled the liberty 
of the people. The people, smarting and groaning under 



246 



ECONOMICS. 



the lasli of the Church and the nobility, had learned to 
hate their masters. The Church had absorbed the best 
property of the commonwealth, which remained untaxed. 
The potentates of the Church and the nobles circled 
around the king, and were supported by the grinding toil 
of the common people. The great mass of artisans were 
crowded into the thickly populated and dingy shops, 
where they worked incessantly for small wages, endured 
great suffering and experienced much inconvenience. 
The condition of the peasantry was even worse. In some 
parts of the country the tillers of the soil were a race of 
serfs, ground down by rack rents, feudal oppression and 
injustice, and subjected to all forms of abuse, being re- 
duced frequently to the very verge of starvation. Others, 
somewhat more comfortable, were subjected to vexatious 
laws, administered with harshness and injustice by their' 
superiors. 

Finally there came a time when the accumulation of 
evil was greater than the nation could stand. Short- 
sighted philosophers and agitators, observing the condition 
of affairs, began to look about for the cause, and found 
it in the imperfection of social organization of the gov- 
ernment. They therefore thought if the government was 
the cause of the evil, the only way to reform was to dispose 
of the government. They must tear down the present 
structure and build anew from the foundation. The spirit 
of their philosophy was caught by the infuriated mob, and 
the French Revolution came with all its terrors and bloody 
deeds. It was in this period that socialism again ap- 
peared as the solution of the problem of social order. 



ECONOMICS. 



247 



Modern Communiam. 

Its first chief advocate was the communist, Babeuf. 
He had been preceded by Moreillet, who in his code of 
nature taught that man by nature possessed every virtue 
and was only depraved by the influence of bad institutions, 
and that the worst of these bad institutions was that of 
private property. He held that the degradation of pov- 
erty, on the one side, and the enervation of riches, on the 
other, were two causes which kept men from being indus- 
trious. And he held that every person should contribute 
to the state according to his strength and wealth, and that 
in turn the state should support him. Mably followed 
this writer, and held that the establishment of property in 
land had been the great source of avarice, of ambition, and 
of vanity. 

While the French Revolution had for its war-cry, 
"Equality and fraternity," Babeuf and his followers held 
that the only way to establish this equality and fraternity 
was to abolish private property and pass into a state of 
pure communism. Hence in 1796 Babeuf organized his 
band of "equals," who wished to overthrow the state gov- 
ernment and reestablish it on a purely communistic basis. 
His theorj/ concerning government was that the aim of 
society was the happiness of all, and that happiness con- 
sisted in equality, and that there was no way in which 
happiness could exist unless perfect and absolute equality 
reigned. He held that inharmony would prevail if a 
single individual in the world was richer or more power- 
ful than his fellows. And Babeuf and his followers were 
ready to make any sacrifice whatever for the sake of this 
equality. They said: Let all the arts perish, if need be, 



248 ECONOMICS. 

provided we retain real equality. They held that nature 
had given to every man an equal right to the enjoyment 
of all goods; yet they proposed to obtain this equality 
by coercion. A large national property might be obtained 
by seizing the property of corporations and public institu- 
tions, and this could be added to by gifts and by continued 
absorption until the government should own all the prop- 
erty and all the means of production. The people were to 
be divided into different groups of laborers, and each as- 
signed to his particular group. All social conditions, save 
those relating to sex and age, were to be abolished. Equal- 
ity having been gained universally, all must be dressed 
alike, all must eat the same quantity of the same kinds of 
foods; and all must be educated alike, and all education 
must be restricted to the elementary branches, that inequal- 
ity might not continue to exist. Even the children were to 
be removed from the family at an early age and brought 
up together, in order that they might be trained in the 
principles of communism and educated on the basis of 
equality. The whole scheme seems dreary and monotonous 
enough. Everything was contrived to level the people 
down and not to elevate them, to bring the highest down 
to the plane of the stupid and self -contented of a lower 
order. 

Etienne Cabet. 

From this dismal picture let us turn to Etienne Cabet, 
the son of a cooper, born in Dijon, France, 1788. A well- 
educated man, he practiced law for a while in his native 
city and subsequently in Paris, and finally became 
attorney-general for Corsica in 1830; but he lost his place 
in the following year, on account of his fierce opposition 



ECONOMICS. 



249 



to the government. The remainder of his life was devoted 
to politics, literature, and commimism. He wrote a popu- 
lar history of the French Revolution, and published a jour- 
nal in which he advocated moderate communistic prin- 
ciples. For some of his utterances he was condemned to 
two years' imprisonment. But escaping, he fled to Lon- 
don, where he became acquainted with Sir Thomas More's 
Utopia, which made a deep impression on his mind. He 
returned to France in 1836 and published his book, en- 
titled "A Voyage to Icaria." In this he describes a coun- 
try previously unknown, quite as large as France or 
England, but more populous and a thousand times more 
blessed. " Here crimes are unknown ; it is a second prom- 
ised land, an Eden, an elysium, a new terrestrial paradise.'' 
The whole book was a philosophical social romance, a 
dream of dreams. Cabet, who had many followers in 
France, was challenged to put his theories to the test, in 
answer to which he organized a colony for settlement in 
Texas. Failing to make a lodgment in this wilderness, the 
company passed up the Mississippi and settled at Nauvoo^ 
in Illinois, a place which had recently been vacated by the 
Mormons. Subsequently he passed into Iowa, and founded 
the town of Icaria. Cabet returned to St. Louis, where he 
died in 1856. But the town of Icaria continues to exist to 
the present time, although but a year ago it passed into 
the hands of a receiver for the sale and distribution of the 
property. Thus ends one of the most romantic and inter- 
esting attempts at communism known to history. The 
people of Icaria dwelt and toiled together many years, 
sowing seeds and harvesting crops which they put into a 
common granary. The men all dressed alike in blue duck 



250 ECONOMICS. 

suits; thej went to market in blue wagons drawn by ox 
teams. They lived a rude, homely, peaceful life; but the 
rising generation, stirred by thoughts of modern life, by 
a desire for progress and change, could no longer be held 
slaves to an ideal system. For how different was this rude 
picture of this slow-going community from the dream that 
had been presented! It may be a noble thing for men 
and women to withdraw from the sharp competition of 
individual interests and combine themselves in an organ- 
ization based on equality and brotherly love ; it is a beau- 
tiful picture to see in our visions and dreams a group of 
people living in ease and elegance, happiness, peace, and 
perfect harmony : but how different from the cold, dreary, 
prosaic, monotonous life of the actual reality! And this 
contrast, together with the desire to be men and women, 
on the part of the younger members of the community, 
to mingle freely with others in the pursuit of happiness, 
pleasure, and wealth, was sufficient to cause the system to 
break down by its own weight. 

Cabet advocated a general transition to communism. 
He thought it would take fifty years for such a transition. 
The principle of the organization was simple enough. 
Cabet says : " If we are asked, what is our science, we 
reply fraternity; our theory, fraternity; our system, fra- 
ternity." Cabet was the first and greatest pure communist 
of France, and Icaria the most ideal community ever in 

practice. 

modern Socialism. 

Saint-Simon was a socialist. He held that individuals 
should organize themselves into natural associations for 
the purpose of carrying on production and distribution. 



ECONOMICS. 251 

The communist believes in equality; the socialist in dis- 
tributive justice. Saint-Simon held that men were nat- 
urally unequal, and that this inequality was the very basis 
of association and an indispensable condition of social 
order. He and his followers, then, rejected the system 
of community of goods, for this would be a manifest viola- 
tion of the doctrine which they taught, namely, that the 
purpose of all social institutions should be the moral and 
physical amelioration of the most numerous class; that 
all privileges of birth, without exception, should be abol- 
ished, and that rewards should go to each according to 
his capacity, and each capacity estimated according to its 
works. The followers of Saint-Simon were diligent in 
their efforts to improve the lot of the people and to relieve 
the distressed, but except in theory they ended in failure. 

Fourier, 
Fourier held doctrines similar to that of Saint-Simon. 
The principles advocated by the followers of Fourier were 
lofty, noble, and generous in the extreme. They held as 
the essential duty of society and of every individual to 
regulate their conduct so as to produce the greatest possible 
benefit of humanity, and to make this the consistent object 
of all their thoughts, words, and actions. The perception 
of this duty was dictated to the sages of all times in the 
following precepts: To love truth as one's self; — To act 
toward others as you would wish them to act toward you ; 
— To give a common support to one another; — The per- 
petual and gratuitous assistance from nature proves that 
man, by the very fact of his birth, carries and never 
should lose certain natural rights in the wealth that is 
produced. Hence it follows that the weak have a right to 



252 ECONOMICS. 

enjoj what the processes of nature and the public prosper- 
ity place at the disposal of man, and that it is the duty of 
the strong to leave to the weak a just share of the general 
product. 

The influence of Fourierism was very great in America. 
Many prominent people, taking up the beautiful doctrine 
advanced, tried to put it into practice on American soil. 
Among those who encouraged it were: Horace Greeley, 
Charles A. Dana, Albert Brisbane, George Eipley, Dr. 
Channing, and Margaret EuUer. Altogether, thirty-four 
experiments of Fourierism were made in America, all of 
which failed or are to-day in a rapidly declining condition. 

State Socialism. 
I must refer to one or two other French socialists. 
Louis Blanc was the first to join social and economic 
reform to politics ; he was the first state socialist. Saint- 
Simon and Fourier were merely economic and social 
reformers. They were not politicians or political organ- 
izers; they appealed simply to brotherly love and to jus- 
tice, and sought to overthrow self-interest. Louis Blanc 
assumed, as his prime principle, the right of every man to 
labor, and he therefore held that the government should 
build workshops for the employment of the unemployed. 
Though of great influence at the time, his career was 
short-lived. But it is strange to note how he impressed 
upon so many followers in so short a time the great im- 
portance and righteousness of his scheme. He found the 
aim of life to be happiness and development; happiness 
and development combined, he taught, can only be ob- 
tained when the state takes hold and regulates social in- 
dustry. He says that fraternity means we are all common 



ECONOMICS. 



253 



brothers of one great family, and that it is ordained by- 
God himself that man should produce according to his 
wants. This was his formula of perfection and justice, 
and to this end he thought the state ought to acquire public 
property by degrees, and after a long time it would grow 
into a state of perfect socialism. The whole plan rested 
upon distributive justice. It is true that there are places 
in the world that need large natures and fine intellect; 
there are likewise humble positions which must be filled. 
It was a happy ideal that all people could labor together 
as one great family in the higher and lower degrees, and 
each one receive compensation according to the service 
performed and have his wants supplied according to the 
station which he filled. It was one more golden dream 
to be added to the category of the many which had philoso- 
phized about a paradise on earth. 

Anarchism. 
Proudhon followed Louis Blanc. He hated the rich^ 
but he felt for the poor, and desired to bring about a social 
state which would be of great assistance to them. He 
desired to level all organizing power and to develop per- 
fect individuality. His theory w^as contradictory, for the 
supposition assumes that perfect collectivism and perfect 
individualism can exist at the same time. He startled 
the world by asking, "What is property?" and gave the 
more startling reply, "Property is theft, and property- 
holders thieves." Proudhon was an anarchist. ^Vhat was 
the ideal government in his eyes? No government. He 
desired absolute liberty. He rejected communism, but ad- 
liered to the prime principles of socialism, and held that 
property was the suicide of society. He was an earnest, 



254 



ECONOMICS. 



sincere man; he loved the people, and sought to improve 
their condition. He said: "O God of liberty, may my 
memory perish if humanity may but be free ! If I may 
but see, in my obscurity, the people finally instructed, if 
noble instructors but enlighten them, if disinterested 
hearts but guide them!" This ideal anarchist philoso- 
phized a government out of existence; the practical an- 
archist seeks to destroy by force. The one has a beautiful 
theory, the other proposes a horrible actuality. 

German Socialigm. 
Brief mention must be made of the German socialists 
represented by strong natures like Ferdinand Lassalle, 
Rodbertus, and Karl Marx, who have mingled the doc- 
trines of economic life with politics and developed the 
social democracy of Germany. They have been, as a rule, 
closer students of human society and economic principles 
than the French; they have been more systematic, more 
analytic, but not less earnest in the advance of their 
theories. They have laid great stress on the fact that 
labor is the source of all wealth, and that the proportion 
of goods falling to the laborer as production advances is 
continually decreasing. I have not space to mention the 
modern German socialists, one branch of which is led by 
Bebel and the other by Liebknecht, and the growth of 
social democracy in Germany. Worthy of mention are 
the influence of Robert Owen in England in the early 
part of this century in developing communistic coopera- 
tion, the later societies in England for the advancement 
of pure socialism, and the recent growth of the socialistic 
labor party. There should be recorded also the history of 
the progressof these ideas in America, and the attempts that 



ECONOMICS. 



265 



have been made to establish commimism, socialism, and 
anarchy in our own country. The works of such men as 
Bellamy, the great advocate of state socialism, of Henry 
George, the advocate of nationalism in land, and of the 
Christian socialists that have sprung up in recent days, 
are all worthy of mention. 

Socialism in America. 
^o one can ignore the rapid growth of socialism in Amer- 
ica, nor minimize the social tendency of this age. Such 
classes of persons, who not only insist on the government 
of monopolies but also believe that the government should 
ovm. all productive processes, are constantly increasing. 
They hold that the railroads and the telegraphs, canals 
and water-ways, gas-works and electric lights, farms, tim- 
ber lands, mines, mills, factories, and stores, — in fact, all 
industrial enterprises, — should be under the immediate 
control of the government. This is pure socialism, and 
carried to its extreme limit abolishes the wage system and 
establishes an equitable method of distribution. Others 
go so far as to advocate that all competition should be 
abolished, and that subsistence and support be guaranteed 
without protest to every individual. 

This is the ultimate conclusion of pure socialism. The 
ranks of this army of idealists are recruited b^^ people of 
widely different characters and conditions of life. There 
are those whose motives for a better life for all humanity 
are not to be impugned, any more than the motives of 
those who think that free competition, which gives a free 
and full play of humanity, wall yield the highest and best 
return of human profit and happiness. They realize more 
clearly to-day than ever before the imperfections of human 



256 ECONOMICS. 

government, and present witli greater earnestness the 
ideals of perfect society. The idealists are impressed 
more forcibly than ever before that a perfect society could 
be realized if the people only willed it. They are seeking 
the highest good of the greatest number, and are ready to 
sacrifice health and fortune for the advancement of these 
ends. Deceived they may be by the socialistic mirage, 
yet their earnestness and sincerity cannot be successfully 
denied. 

There are also found within this group of recruits to the 
army of socialism, people who represent the basest and 
most irritating forms of human selfishness. They desire 
state ownership of industries that they may receive more 
from the community than they are entitled to receive. 
They desire a new regime that they may be in a position 
to profit from the toil of others. It is the same sort of 
selfishness which prompts the individual to seek piratical 
freedom which will enable him to possess all that he can 
of this world's goods, by fair means or foul, regardless 
of the sufferings of others. The very selfishness of their 
own hearts makes them cry out against the selfishness of 
others. 

The ranks of the socialistic army are also daily recruited 
by people who started out fearlessly and honestly for a re- 
spectable position in social life, and having been defeated 
in their combat, are discouraged and despondent. When 
they find many others in the same condition as themselves, 
they believe that there is something radically wrong in the 
nature of affairs when patience and honest endeavor fail 
to reap their just reward. They observe that part of the 
people are happy and prosperous, and a part, like them- 



ECONOMICS. 



257 



selves, miserable and poverty-stricken. Victims of the 

teachings of the demagogues of the selfish class, they 

hastily conclude that this difference of condition is due 

to the unjust principles of social organization, and they 

turn instinctively to the state for the redress of grievances, 

believing that it has the power to equalize conditions of 

life. 

Inadequacy of SocialiBin. 

We observe, then, that there is nothing particularly 
new in this modern doctrine of socialism ; it has historical 
foundations. The socialism of to-day is founded upon the 
accumulated error of past philosophy and present practice. 
Before closing this chapter, let us leave for a short time 
the historical current of its onward sweep, and ask briefly, 
What are the defects of its philosophy, and what are the 
remedies for the evils which it points out ? Granting that 
many of the evils which these idealists have pointed out 
to us are real; granting that their beautiful theories and 
their optimistic plans have given us at times enthusiasm 
and warmed our hearts; acknowledging that they have 
had some influence over the philosophy of modern gov- 
ernment and are having it to-day; — what are the defects 
of their system ? 

In the first place, the evils which the socialists have 

pointed out have been greatly exaggerated, and the times 

have been pictured to be much worse than they really are. 

Our industrial system under present conditions is not an 

unmixed evil. The changes which it has wrought through 

invention and discovery, by working immediate injury to 

some will work final benefit to all. The rapid movement 

of productive enterprise leads to much irregularity in the 
—17 



258 ECONOMICS. 

business world and gives rise to much distress, — neverthe- 
less, society is in a much better condition to-day than ever 
before; and if we consider the evolutionary process by 
which society develops, we shall find that justice and 
equality are more nearly approximated to-day than ever 
before. The search-light of modern investigation, coupled 
with the diffusion of learning, has enabled us to see things 
more clearly as they are. Consequently, we behold more 
clearly the nature of the evils which society has to combat. 
If we are faithful in searching out the evil things which 
society has to combat, let us be faithful also in searching 
out and magnifying the excellences of modern economic 
and social life, and we shall see the advantages of our 
modern system. 

Again, even if the evils which the socialists portray were 
greater than they have been represented, there is no assur- 
ance that extreme socialism would remedy the defects of 
rank individualism. Socialists have been guilty of taking 
a partial diagnosis of the case, and consequently have pro- 
posed inadequate remedies. In their zeal to reach an 
economic millennium on earth they have read history care- 
lessly and superficially and have interpreted it falsely. 
They have selected from a few economists those systems 
which best suited their system, and with insufiicient data 
have reasoned illogically. They have juggled with half- 
knowledge, from which they have attempted to deduce 
general principles. Granting that the healthy and volun- 
tary cooperation of industrial classes is essential to all 
good economic progress, and granting, too, that there is a 
continued tendency to monopolistic power in production 
as well as in distribution, they have failed to prove that 



ECONOMICS. 259 

it is necessary for the government to own and manage all 
resources of industry in order to secure to the people the 
benefits of this monopoly arising out of excessive free 
competition. They have furnished no guaranty what- 
soever, or even a strong probability, that socialism could 
regulate the disorders of economic life. 

Perhaps one of the weakest points in the system offered 
by the socialists arises from the fact that they offer no 
definite plan for the rapid transition from individualism 
to socialism. They simply state it will be so, and expect 
people to accept the system. One of the most prominent 
socialists of the United States in making an address a short 
time since drew a fanciful picture showing how socialism 
would be accomplished within ten years, and how by that 
time all parties would be leaving the system of competition 
and rushing forward to adopt state socialism. He held 
that the time was at hand when the capitalist and monopo- 
list would gladly free themselves from the present ruinous 
practice of free competition, and elect socialism. The plan 
of the transition, however, was left out, and the possible 
results of failure were never for a single instant consid- 
ered. He began his peroration with the following words : 
" There is a dream hovering in the air," which seemed to 
be a fit climax to an illogical and ineffective argument. 
The whole plan is a dream, which if ever realized will 
be to the generations yet unborn. 

But people may inquire: If it is so illogical, what 
harm can it be to have this dream ? Why not keep before 
the people a perfect ideal government ? The harm is to 
the toiling wayfarer on the dusty plains who sees in the 
distance the mirage, and travels on with hope of presently 



260 



ECONOMICS. 



being in the sliadj groves by cool waters where rest can 
be obtained and thirst quenched. He comes to the spot 
but to see it recede in the distance, or the whole vision 
to dissolve. The man who is toiling to build a home for his 
family, and beholds year after year the failure of all his 
plans, sickened with deferred hope, is taught that the cause 
of this condition is imperfect government or imperfect in- 
dustrial system, turns readily to a plan which will relieve 
his present exigencies and yield him what he terms a just 
and fair return for his labor. As a result of this belief he 
becomes more and more discontented with his lot, and the 
social world of toil becomes more distasteful to him as he 
persuades himself that injustice is being done him by 
the government. Failing to realize his hopes for imme- 
diate relief by means of socialism, he enters the field of 
expectancy, then of pauperism and vagrancy. Thousands 
go down to join the ranks of paupers and vagrants every 
year on account of false hopes held out to them by the 
theories of socialism. The evil effects of teaching a per- 
nicious doctrine are great. 

Again, socialism fails to account for the present condi- 
tion of human nature as revealed by past history and pres- 
ent conditions. It has made no allowance for the contin- 
uance of the selfish greed of humanity. Socialism once 
established, will there not be an endless struggle for place 
and preferment, a struggle for supremacy, ending in ex- 
cessive dominance of man over his fellows ? And will there 
not be a much larger opportunity for this dominance and 
selfish aggrandizement than there is now? Have we any 
guaranty that human nature will be changed in the twink- 
ling of an eye from hard, selfish, grasping impulse to that 



ECONOMICS. 



261 



of noble, brave, and generous disposition which impels 
the individual to share all good with his fellows ? Such 
an assumption is a vain delusion, a dream, and could only 
bring about political and social revolution combined, which 
would end in the spilling of blood in the struggle for dailj 
bread, a revolution such as the world has never yet seen. 
The assumption that, because free comj)etition in the 
industrial world has led to increased selfishness and arbi- 
trary dominance of certain ones who accumulate great 
wealth from others, and that if we could change the man- 
agement of all industries to the political power, namely, 
the state, we should be relieved from these evils, is entirely 
false; for it assumes that selfishness does not exist in 
political circles and is not manifested in the political affairs 
of the state. Every one knows that selfishness is more 
evident to-day in the common political life than in the in- 
dustrial, and that selfishness occurs not only on the part of 
those already in power, but is just as prominent in those 
outside of power, who are waiting for an opportunity to 
elevate themselves regardless of justice to others. The 
political conditions of the day are indeed far worse than 
the economic conditions, for tLo former consist in the re- 
placement of one spoils system for another, while in the 
economic world we do see some potent signs of the pro- 
gressive regulation of principles of justice and equality 
in the production and distribution of goods. To place 
everything under a political hierarchy means the concen- 
tration of selfishness and the removal of the last checkj 
called competition, from the field of operation. To illus- 
trate this fact, we need only to point to the dangers of con- 
centrated selfishness in the political management of our 



262 ECONOMICS. 

large cities during the past forty years. Here we see the 
enlarged power of human government in the hands of indi- 
viduals struggling selfishly for the largest possible indi- 
vidual gain. We observe frequently the same tendency 
in the increased centralization of our national government. 
While in the smaller communities of local government, 
where less selfishness is concentrated, the will of the people 
is more nearly expressed. But the political dangers of 
socialism are entirely overlooked by the socialists. They 
have not accounted for the vagaries of human nature, which 
have existed from the time when man first began to 
struggle with his fellows for subsistence. 

Reforms Proceed from Local Gosrernment. 

It is also to be observed in the history of the development 
of government that all reforms have proceeded from local 
conditions to the central government, and not in an op- 
posite way. If this is universally true, are not socialists 
moving in the wrong direction in trying to establish 
a general law which shall regulate individual practice 
rather than trying to modify individual and local practice, 
thus seeking to reform the central government ? Recogniz- 
ing this as a natural method for all reforms, it would 
seem more rational for socialists who are desirous of bene- 
fitting humanity to establish themselves on some of the 
cheap lands of America and begin to apply their social- 
istic doctrine, and this would put matters to a practical 
test. Communists have tried this experiment again and 
again, and in nearly every instance have failed, until 
communism has become almost a thing of the past. If 
socialism should succeed, working along the line of natural 
development of reformatory methods, — from the local to 



ECONOMICS. 263 

the central government, — the peoj)le of the United States 
would hail with joy any complete system whose success 
could be demonstrated. If they failed, the dream would 
be exploded. Economic experiments where the doctrine 
of socialism could be tested in practice are highly desirable 
at the present time. Those countries like JSTew Zealand, 
which have advanced too rapidly with changes toward the 
state control of industries, have usually regretted it. 

Another gross error into which the advocates of this 
system have fallen is based upon the teaching of the Gospel, 
which has been claimed by some as a powerful force in the 
development of socialism. But if the Master taught the 
common brotherhood of humanity and insisted upon justice 
and mercy, he also taught that man should not be compar- 
ing himself with his fellows as a criterion for correct life. 
But this age has become the age of individual, and, it 
may be said, invidious comparisons, — the age in which we 
estimate our life and our prosperity by the lives and pros- 
perity of others, instead of having in mind the ideal life, — 
and this has been extended more especially into the indus- 
trial world. Now the wage-earner compares his shelter 
and his food, his opportunities for culture and learning, 
leisure and travel, with those of the millionaire, and he is 
soured and disgusted with the contrast. Humanity never 
got into a worse condition than this. The spirit of extreme 
individual comparisons leads to malice, envy, and crime. 
The assumption that with the state ownershii^ of industries 
these contrasts would disappear, is idle and chimerical. 

In the adjustment of social rights these facts must be 
regarded as fundamental to the great law of social progress. 
There is not only a diversity of employment in the world, 



264 



ECONOMICS. 



but a diversity of human capacities and characteristics 3 
indeed, the fundamental progress of the universe rests 
upon this variety of life. Under a socialistic system some 
must be employed as officers of the state in great com- 
mercial enterprises, which means that others must do 
servile work, and in fact an entire gradation of em- 
ployments from the highest to the lowest must continue to 
exist. Is it to be supposed for an instant that where the 
spirit of comparison of the benefits of this life exists, 
which is born of selfishness and distrust, of ambition and 
avarice, that we shall have any less inequality because of 
a sudden transition to state exploitation of all industries ? 
Such an assumption is unwarranted and unfounded. In- 
deed, under the present status of human society, the most 
complete institutions and theoretically correct principles 
and methods are liable to abuse by men in power, and until 
the slow process of the regeneration of human nature 
reaches a higher state, until, step by step, the evil practices 
have been eliminated, we cannot count on any improved 
condition of humanity by a transition to socialistic usage. 
Those who earnestly advocate this doctrine have appar- 
ently failed to observe that the social misery of to-day is 
not wholly dependent upon capitalistic production, for 
the world at large is in better condition now than ever 
before. And if there has been a slow evolution of justice 
in capitalistic production during the past century, is it not 
fair to assume that it is better to continue in this slow 
process of development rather than venture suddenly upon 
an unknown sea without chart or compass, and no guide 
save the dreams of theorists, which have been accumulating 
for the past two thousand years ? Moreover, everybody 



ECONOMICS. 



266 



admits the rapidity of production under the individual 
system. Apparently the socialists have failed to realize 
that there will be an immediate f alling-off in the production 
of economic goods the moment that state socialism pre- 
vails; and in view of the fact that socialism promises a 
large return to every man, how will this larger return be 
made possible ? It is quite easy to see that a change irom. 
the present economic system to a socialistic regime would 
not eliminate the evils of economic society. It is quite 
difficult to apply the socialistic doctrine to the practical 
affairs of life. At best, economic systems grow ; they are 
not made to order, nor are they thrust aside at the behest 
of political government. 

Nat\ire of Progress. 
Progress is essential to the life of society. The struggle 
for existence is essential to progress. There are two 
pictures: one represents man struggling against external 
nature for protection, and against his fellows in competi- 
tion; the other represents man struggling for the exist- 
ence of others, and cooperating with his fellows in the 
production of wealth. The two blend in one genuine pic- 
ture of social progress. The one represents the personal 
struggle for existence, the other the social struggle for the 
existence of others. If either be suppressed, modern prog- 
ress ceases. The personal struggle for existence is essen- 
tial to wholesome individual life; it is necessary for 
a perfect social fabric. So far as socialism suppresses or 
advocates the suppression of this personal struggle, it is 
detrimental to the best interests of social life. So far as 
it attempts to guarantee the support of all through a com- 
mon center, and remove responsibility from the individuals 



^66 



ECONOMICS. 



and families, so surely will the laws of social evolution be 
violated and social degeneracy set in. There must be 
a survival of the fittest to associate, the fittest to cooperate, 
if the social structure is to grow. This survival can only 
be tested by individual struggle and diversity of life. 

It is properly held that nature likes uniformity of law 
and ignores uniformity of the species. Variety in life is 
essential to existence. So far as the social organism is a 
natural body, the same law holds good ; equality and uni- 
formity are ignored as non-progressive, while diversity 
and variety are deemed essential to the existence of the 

social body. 

No Formula for Reform. 

Remedies for existing evils may not be discussed fully, 
but it may be suggested that more attention be given to 
character in proportion to intellect. The highest type of 
cooperative individual is dependent fully as much upon 
character as intellect. Among modern reformers too much 
stress has been placed upon mere intellect as causation in 
social evolution, and too little upon character. Too much 
stress has also been laid upon the power of the general will 
to force social reform. Thousands of reformers crying in 
the market-place that something ought to be done have 
brought on a condition of expectancy that something would 
be done, and the individual has looked to the government, 
to society, to chance, and even to Providence for help^ 
while his degenerate feet allowed him to slip into the 
great social residuum that exists on the borders of pauper- 
ism and crime. We need to teach and to learn individual 
responsibility, in the home, in the school, in the churchy 
in the civil government. With it social responsibility will 



ECOITOMICS. 



267 



come as a natural sequence, for individual responsibility 
must include responsibility of education, power and wealth, 
as well as the responsibility of self-preservation. This 
can all be acquired under the present economic regime. 
The system may be modified, but it will not break down. 
The highest phases of culture and learning are accom- 
panied by the worst forms of degeneration; wealth and 
poverty, generosity and selfishness, justice and inhumanity^ 
virtue and vice, exist side by side. There is no patent 
cure for all our ills. When a man has a measure which 
he claims, if adopted by the government, will regenerate 
society, banish strife and selfishness, eliminate poverty 
and distress, cure pauperism and crime, one should regard 
it in the same light as the patent medicine which proposes 
to cure all bodily infirmities. Society cannot be cured 
by the direct application of nostrums. And it is evident 
to-day, as we look out at this great social struggle; as we 
observe the grinding of the millions in their ceaseless 
round of anxiety, strife and care ; as we see the inhumanity 
of man to man, the injustice, wretchedness and crime in 
the world, — indeed, as we behold all this, there is but one 
permanent cure, and that is education. The development 
of individual powers, individual life, individual culture, 
and the preparation of that individual for the active social 
duties of life, — this alone will preserve the present and 
insure the future. But this must include the development 
of moral character, moral courage, and moral responsibility 
of the lives of others, while we insist upon intellectual 
quickening. We shall solve the problem of life by develop- 
ing what is best in ourselves and in those with whom 
we come in contact. Out of this must come the regulating 



268 



ECONOMICS. 



power that will eliminate selfishness and bring about jus- 
tice in the existing economic order. 

The prosperity of a nation rests upon the character of 
individuals. As Mr. Lecky well said, concerning the pros- 
perity of a nation, in his essay on the Political Value of 
History : " Its foundation is laid in pure domestic life, 
in commercial integrity, in high standard of moral worth 
and of public spirit and simple habits, in courage, upright- 
ness, a certain soundness and moderation of judgment 
that springs quite as much from character as intellect." 
As these qualities and characteristics increase and pre- 
dominate, the national life grows better; as they decline^ 
it degenerates. 

References: Ely, E. T., Socialism and Social Keform; Ely, 
R. T., French and German Socialism; Bellamy, Edward, Looking 
Backward ; Bellamy, Edward, Equality ; "Webb, Sidney, and others, 
Fabian Essays on Socialism ; SchaflSe, Quiutessence of Socialism ; 
Flint, Robert, Socialism. 



PART III. 

CONSUMPTION. 



CHAPTEK I. 
NATURE OF CONSUMPTION. 

Consumption Begulates Production. 

The amount of goods consumed is in one sense a record 
of the degree of satisfaction of wants, and as demand 
always springs from a desire to consume, in modern eco- 
nomic processes the amount manufactured will depend 
to a large extent on the amount demanded; hence it is 
that consumption limits production. While no goods can 
be consumed until they are produced, and in the mechan- 
ical process consumption must be preceded by production, 
consumption after all stimulates desire. This principle 
is carefully observed in the causes and processes of panics. 
As soon as consumption falls off, or, indeed, as soon as 
a distrust arises that people will not consume what is pro- 
duced, production ceases and there follows a trade de- 
pression. In the revival from panics it is the desire for 
goods, or consumption, which sets the wheels of industry 
going. So important is this question of consumption in 
relation to production, that some authors have laid it down 
as the first principle in economics ; however, it is only 

(269) 



270 ECONOMICS. 

throngli the law of supply and demand that it takes prece- 
dence. 

Consumption Inseparable from Production. 

Whichever way consumption may be considered, it is 
inseparable from production. The whole economic struc- 
ture rests upon the principle of the satisfaction of human 
wants. The effort of mankind to obtain material objects 
or goods or the services of others in satisfaction of wants^ 
is the fundamental principle of the science. •' In the satis- 
faction, then, of these material wants, we find the formal 
basis of active life. The primary basis is the satisfaction 
of the merely animal wants, such as food, drink, clothing^ 
shelter; these are the things that men strive for every- 
where. As- man's nature evolves he finds it expanding 
into a thousand wants and desires, built upon the economic 
life as the formal basis of the superstructure of civiliza- 
tion. Men toil to satisfy the wants of religion, to pro- 
mote the moral nature and the aesthetic faculties. Consid- 
ering the social conditions of mankind, we find this idea 
expanding into railroads, highways, sanitation, education^ 
public parks, institutions for the care of the weak, indeed 
into all public needs which must be met by economic 

activity. 

Variety of Human Wants. 

In the savage state man's wants are few, and it takes 
his entire life to satisfy them. As civilization increases, 
desires multiply, wants become innumerable, and renewed 
effort must be put forth to satisfy them. By increased 
intelligence, which enables man to use the power of inven- 
tion and to apply the forces of nature, he is enabled to 
multiply the means for the satisfaction of wants. We 



ECONOMICS. 



271 



seek everywhere for the qualities embodied in material 
objects to satisfy our needs. We also seek the personal 
services of others. We desire food and clothing and objects 
of art and beauty, and so, on the other hand, we desire to 
travel and to employ the services of others in conveying 
us from place to place. 

Degree of Want. 
Each individual arranges his wants in the order of 
their importance, but the degree of importance of the 
wants of different individuals varies. The chief desire of 
one man may be for a coat, of another for warm food, while 
the chief demand of a wealthy person may be a thousand- 
dollar painting or a five-thousand-dollar horse. The de- 
gree of intensity with which people desire certain things 
has a vast deal to do wdth the regulation of the kind and 
amount of consumption, as well as the development of the 
prices of production. As civilization progresses there is 
comparatively less time spent obtaining the bare neces- 
saries of life, such as food, clothing, and shelter ; and more, 
proportionately, in obtaining those which lead to intellec- 
tual culture, — more spent in the development of the deriv- 
ative qualities of mankind. In an actual social organiza- 
tion, education, art and literature may not be essential 
for the perpetuation of life or the perpetuation of the 
species, but they are essential to its higher development. 
To that extent culture is desirable. It produces a better 
life and a better class of people. 

Satisfaction of Economic Wants. 

In Political Economy we have to deal with only the 
satisfaction of economic wants, chiefly material goods. 
Such goods as nature has furnished in abundance," like 



272 ECONOMICS. 

Avater, air, sunlight, are not economic wants; they are 
called free goods, and are not subject to the processes of 
economy. However, these have a tendency more and more 
to be appropriable in service or material. Water in the 
cities has become an economic good ; also, for the purpose 
of irrigation, it is bought and sold. It may be that the 
service performed is the chief consideration, but in reality 
it is the furnishing of the economic good that determines 
the economic condition. Air pumped into mines and 
tunnels may become an economic good as it is bought and 
sold in the market, and would have under such circum- 
stances an economic value the same as food or clothing. 
If sunlight should be concentrated so as to run engines, 
power might be developed in that way and sun-heat would 
become an economic good. The generation of electricity, 
which is free to all everywhere, when transmuted into 
power becomes an economic good, and electrical power 
is bought and sold. So we shall find that in the process 
of development man enlarges his sphere of activity from 
time to time and the purely economic goods encroach 
upon the free goods, appropriating to themselves goods 
which were formerly free. 

Immediate Consumption and Final Consumption. 

All goods are produced for the sake of consumption. 
Some of these are for immediate consumption in the grat- 
ification of wants, such as food for the sustenance of life, 
or raw material for the production of other goods, as coal. 
Final consumption is the last use of an article, and means 
the last use it is put to in the development of the economic 
process. Thus, trees are consumed in furnishing lumber ; 
lumber passes through the planing mill and subsequently 



ECONOMICS. 



273 



is made into articles of furniture. The use of the furniture 
is the last use of the lumber. The consumption of wealth 
is necessary for the production of other wealth. Thus^ 
that portion which is set apart for the furnishing of means 
for producing other wealth is called capital. Its object 
is consumption. The final consumption represents the 
destruction of the utility. 

Productive Consumption. 
Productive consumption is that in which the value re- 
appears in the utility of the finished product. Thus, coal 
used in creating power passes through the process of 
being consumed and reappears in the value of the finished 
product. The coal which is used for heating purposes 
only is consumed in the final act ; it has served its economic 
process there. But the economic process in production is 
entirely different. Many goods serve as raw materials 
in the manufacture of finished products; also, tools and 
machines are consumed in the production of other articles, 
the ultimate aim of the whole process. The consumption 
of goods by the laborer is sometimes said to be productive 
consumption, but this can only be true in the case of the 
consumption of such articles as are a necessary part of the 
process of production by the laborer. For consumption by 
man is the aim of all production; when goods have been 
consumed thus, their economic purpose is fulfilled, unless 
otherwise intended as stated. 

Oonsumer's Profits. 
In consumption all are looking for the largest use of 
material goods. Producers create goods for the purpose 
of selling in order that they may realize a margin of 
—18 



274 



ECONOMICS. 



profit. The consumers buy them in the cheapest market 
with the expectation of obtaining some advantage in buy- 
ing. There is always competition in buying as well as 
competition in selling. While those selling hope to make 
good terms for themselves, those buying desire to retain 
the advantage on their side. Thus, competition tends to 
reduce the purchasing price, which would yield a profit 
to individuals. All distributive cooperative institutions 
have for their purpose the making of profits, which arise 
from careful purchasing for the consumer. 

References: See following chapter. 



ECONOMICS. 



275 



CHAPTER 11. 

CONSUMPTION AND SAVING. 

Analysis of Consumption. 

It is held by some that consumption, being essentially 
an entire destruction of utilities, is always accompanied 
by a saving process ; viz., as to what will yield the highest 
return on money expended. In consumption, people are 
always studying as to what most advantageous use wealth 
may be devoted, and then there follows another proposition 
of how this may best be demonstrated. There could be 
a better ordering of the methods of consumption without 
any real retrenchment in the amount consumed. It re- 
quires a careful study as to what should be used. Economy 
in consumption is a very important subject; and by that 
we do not necessarily mean abstinence or niggardliness, but 
a careful and thoughtful study of how to get the largest 
return for the expenditure. 

Engel's Law. 
A careful study of the statistics of consumption shows 
that there is a relative order of expenditure for different 
individuals. Various investigations have taken place in 
Europe and America to show the relative per cents, of 
income expended in the different ways for food, clothing, 
rent, fuel, etc. The first definite results of investigations 
w^ere published in 1867 by Dr. Schwabe, chief of the 
Municipal Statistics Bureau of Berlin, on the relations 



276 



ECONOMICS. 



between rent and income, 
rized liis results : 



The following table summa- 



When the income is: Then the expenditure for rent is: 

900 marks, 216.09 marks, or 24.10 per cent. 

1,500 

2,250 

3,000 

4,500 

6,000 

9,000 
15,000 
30,000 



231.65 ' 




22.10 


450.00 ' 




20.00 


825.50 ' 




27.50 


1,052.55 ' 




23.39 


1,203.60 ' 




20.56 


1,566.00 ' 




17.40 


2,020.50 ' 




13.47 


2,760.00 ' 




9.20 



This social law, which states that "the greater the income 
the smaller is the proportion expended for rent/' has often 
been called Schwabe's law — "das Schiuahesche . Gesetz.'" 
Later, Dr. Engel of the Eojal Prussian Bureau extended 
this "social law" to all the necessaries of life, and in its 
more expanded form the law is usually called " Engel's 
law." 

As income increases, the relative expenditure in the 
different lists changes ; but there are certain constant laws 
of relations of expenditure, derived from statistics. These 
are mainly as follows: — First, the law of constant per- 
centage: as income of family increases, the percentages 
of expenditure for clothing remain approximately the 
same; expenditures for rent, fuel and light remain in- 
variably the same. Second, the laws of variation : as the 
income of the family increases, a smaller percentage of 
it is spent for food. As the income of the family in- 
creases, a steadily increasing percentage is expended for 
education, health, recreation, amusement, etc. 

Of a large number of cases in Germany it is shown 
that the per cent, spent for clothing ranges from 16 to 
18, in Europe from 14.8 to 19.8, while in the United 



ECONOMICS. 



277 



States the clothing expenditure ranges from 12.82 to 16.84, 
showing a slight variation in the changes of income. While 
rent in the United States is from 12.59 to 15.98 per cent., 
it is from 9.38 to 11.93 in Europe. It is seen bv this 
that the subject of rent varies somewhat, though it may be 
regular enough with clothing to be included in the constant 
or relatively constant laws. Food varies from 50 to 62 
per cent, in Germany, 44 to 50.06 per cent, in all Europe, 
and 28.63 to 49.64 per cent, in the United States. The 
following tables illustrate these laws. They also point out 
a great lesson in social economics : that the wants of higher 
civilization caused by education and a higher standard of 
life are not satisfied with the present economic or indus- 
trial system. The ordinary family still has insufficient 
income over the bare necessaries to satisfy desires to the 
extent of producing happiness and contentment. The re- 
form should begin with consumption, if the individual 
is to satisfy common wants and have a margin for the 
satisfaction of extra desires. 

PRUSSIAN STATISTICS.— ENGEL'S LAW. 



Items of expenditure of a family 
of the middle class. 



Percentage of the expenditure of the family of 
a man with an income of from — 



$225 to $300. $450 to $600. $760 to $1,000, 



Subsistence 

Clothing 

Lodging 

Firing and lighting 

Education, public worship, etc 

Legal protection 

Care of health 

Comfort, mental and bodily recreation 





Total 



Per 
50.0 
18.0 
12.0 
5.0 
5.5' 
3.0 
3.0 
3.6 



cent. 
86.0 

-16.0 



100.0 



*ThU should bo 2 -Si to make even per cent. 



278 



ECONOMICS. 



PERCENTAGE OF EXPENDITURE FOR FAMILIES OP DIFFERENT INCOMES 



Object of expenditure. 



Income 
under 
$200. 



Income 

$300 

to 

tiOO. 



Income 


Ineoyne 


Income 


$500 


$100 


$900 


to 


to 


to 


$600. 


$800. 


$1,000. 


Ft. ct. 


Pr. ct. 


Pr. ct. 


15.15 


15.60 


14.96 


5.63 


4.42 


4.00 


.97 


.88 


.74 


15.27 


16.33 


16.84 


43.84 


38.89 


34.34 


19.14 


23.88 


29.12 


10.26 


9.49 


10.49 


3.32 


3.97 


5.19 


1.37 


1.20 


1.53 


15.21 


18.97 


14.15 


50.06 


44.00 


46.24 


19.78 


22.37 


22.40 



Income 

$1,200 

and 

over. 



United States. 

Bent 

Fuel 

Lighting 

Closing 

Food 

All other purposes , 

EUKOPB. 

Bent 

Fuel 

Lighting 

Clothing 

Food 

All other purposes 



Pr. ct. 
15.48 

7.07 

1.01 

12.82 

49.64 

13.98 

9.38 
6.38 
1.66 
19.08 
48.32 
16.18 



Pr. ct. 
14.98 
6.04 
.98 
14.14 
45.59 
18.27 

11.93 
5.49 
1.59 
14.18 
49.58 
17.23 



Pr. ct. 

12.59 

2.57 

.45 

15,71 
28.63 
40.05 



It will be interesting to study the following comparative 
percentages of expenditures of the families of working- 
men in Illinois, Massachusetts, Great Britain, and Prus- 
sia.* 



Items. 


Illinois. 


Massa- 
chusetts. 


Great 
Britain. 


Prussia. 


Average. 




41.38 
21.00 
17.42 
5.63 
14.57 


49.28 
15.95 
19.74 
4.30 
10.73 


51.36 
18.12 
13.48 
3.50 
13.54 


65.00 
18.00 
12.00 
5.00 
10.00 


49.25 




18.27 




15.66 




4.61 




12.21 






Total 


100.00 


100.00 


100.00 


100.00 


100.00 







While the table shows in a rough way the comparative 
percentages of expenditure, in another way it determines 
but little. Take the item of subsistence, for example: 
it is not shown whether the family in Great Britain that 
expends 51,36 per cent, of the income for food is better 
or worse fed than the family in Illinois that spends 41.38 
per cent, for the same, but it shows that the largest item 
of expense in Great Britain is food. The table shows that 



♦From Ely's Outline of Economics, p. 245. 



ECONOMICS. 



279 



rent is a greater item of expense in Massachusetts than in 
Germany or Great Britain, bnt does not show how the 
family lives. While there is a tendency everywhere for 
a family of certain grade to seek the same relative home 
in proportion to income, it is not sufficiently constant to 
show any positive relation. Are rents higher in Massa- 
chusetts than in Great Britain for the same quality of 

house ? 

Inducements to Save. 

Inducements that persons have held out to them for 

saving are, that the same articles may be consumed in 

another way, yielding a larger amount of satisfaction. 

When the standard of life is once established, it requires 

a certain amount of various articles to satisfy it. If the 

standard is raised, there must be a larger expenditure in 

certain lines for its satisfaction. Economy in this respect 

consists in saving from useless or needless expenditure^ 

with the expectation of receiving a larger benefit from the 

goods expended in some other way. 

Spending and Saving. 

There are those who hold to the doctrine that spending 
should be practiced freely in order to make times good; 
that is, the more we spend the greater will be the circula- 
tion of money and the better will trade be. This, however^ 
has its limitations. Money expended in the gratification 
of rational wants, it is true, will lead to rational production 
and proper consumption ; but money or wealth expended 
in uselessness may create as much evil as good, and if all 
were to squander alike with prodigality there would be no 
wealth used for the purpose of carrying on the processes 
of production. 



280 



ECONOMICS. 



Luxury. 

The term luxury is relative. In an economic sense it 
must be confined to extravagance and prodigality. There 
is no general law telling what luxury is, for luxury to one 
person might not be luxury to another. The luxuries of 
one individual may be the commonj)lace articles of another^ 
and the luxuries of one generation may become the neces- 
saries of the next. The money that is expended in riotous 
living is a direct waste, and the money expended in excess- 
ive luxury might be devoted in a larger return to society. 
The millionaire's palace might build a hundred good homes 
for people of ordinary means and taste, and it is a question 
whether his life-work demands any such outlay, or whether 
it is necessary for his best interests. Viewed in this light^ 
it appears that much of the expenditures of life are useless. 
The luxurious wine supper cannot yield a sufficient pleas- 
ure for the amount of waste incurred, hence it is a luxury. 
Whisky, beer and tobacco are worse than luxuries, — they 
are a waste, because of the evil effects on the body. The 
wants of a community are never satisfied, for as we go on 
developing we increase the number of our unsatisfied de- 
sires, which are limitless. Luxurious expenditure can only 
be justified when results are obtained in proportion to the 
sacrifice. A man might burn a house for the sake of 
amusing himself with the play of the flames. It is evi- 
dent that the small amount of gratification has cost a very 
large expenditure, and is out of all proportion to real 
economic consumption. Though the house were his own, 
he would violate moral obligations in consuming materials 
which had cost years of labor and might be made useful 
in many ways. 



ECONOMICS. 281 

Economic Expenditure and Waste. 

The person who, having to consume articles of useful- 
ness, does this in a careless and wasteful manner, violates 
his moral obligations to the community. Hence the hu- 
man race would be greatly benefited if we could have 
economy of food consumption. Now economy of food does 
not mean that the body should be stinted, but only means 
that economy should be used in its selection and in the 
proper preparation for its proper use. Thus we should 
have the largest return for the expenditure. This is what 
is meant b}'" saving ; it is not hoarding articles for the pur- 
pose of gratification of bare possession, but for the purpose 
of seeking out the largest return for goods in hand. There- 
fore, when persons put money in savings banks it is for 
the purpose of getting a larger return in some other way 
than by the gratification of present desires. If a person 
refrains from buying a hat when he does not really need 
it, it is for the purpose of spending the money for some 
want yet unsatisfied. Hence, saving is a relative term, 
and economy is economy in use. In the use of food, for 
instance, there might be selected expensive foods contain- 
ing little real nutriment ; or foods might be selected which 
would not satisfy the wants of the family; or food could 
be wasted, thrown away, and badly prepared; and again, 
there might be a great deal of expensiveness in its prepara- 
tion. All of these things are absolute waste. 

The Desirability of Saving. 

There are very many reasons why saving represents an 

economic advantage. It teaches the individual thrift and 

frugality, including habits of caring for himself, which is 

an insurance against the destruction of labor by poverty 



282 



ECONOMICS. 



and sickness. It is an insurance against reverses in busi- 
ness, which tides the individual over in times of apparent 
stress, but it also enables the use of large amounts of wealth 
in a productive enterprise which otherwise would be con- 
sumed at once. ^Nevertheless, the question of saving may 
be carried too far. If one continues to save to the detri- 
ment of his everyday business or his everyday work, it 
may be in the long run a hindrance to economic progress. 
Sometimes saving is carried on to the extent of impairing 
a business by diverting free capital from one channel into 
another. Examples of this kind are found where excessive 
life insurance is taken, or where a business is entered 
which requires excessive payments or assessments. 

It is sometimes argued by individuals that it is a good 
thing to spend, because it puts money into circulation and 
makes times good. While this is not a good argument 
taken as a whole, there are elements of truth in it. A com- 
munity may be crippled by diverting free capital into 
channels for the purpose of yielding an ultimate benefit, 
but which in reality is at an expense of prosperity. If 
there is a large amount of manufactured goods on the 
market, the consumption of these goods will have a tend- 
ency to quicken the wheels of industry in old established 
lines and create a surplus of income which may be used 
to create new business. But if by strict economy living 
expenses were cut down one-half, consumption falling off 
to the same extent, in order to save this amount from a 
given enterprise to expend in another business which 
would take years for an income, it is plain that the com- 
munity would suffer loss. It is a good thing for a com- 
munity to live well, to keep up the standard of life, for 
this is true economy. Such savings as may be had over 



ECONOMICS. 



283 



and above this good living will not only be an immediate 
but an ultimate advantage to the community. 

National Consumption. 

National consumption is a better estimate of national 
prosperity than national production, if different groups of 
individuals are considered. It is what an individual has 
and enjoys that estimates his standard of life. When we 
say that the per capita wealth of the community is $1,000, 
we mean that the accumulatiofis or savings of wealth 
amount to that much. Now in what form do we find this 
wealth ? It is in money, lands, houses, furniture, clothing, 
books, machinery, implements, etc. It means that we 
have that amount at hand not consumed. Nevertheless, 
nearly all of this is in the process of consumption. If all 
of these goods could be stored in a warehouse awaiting the 
use of the people and there was no demand for them, it 
is easily seen that the wealth of the community would be 
small. It is through consumption that the value of all 
goods is estimated. If consumption were to keep up with 
production, day by day, there could be no such thing as 
national wealth, and from the fact that consumption does 
not keep up with production we have a surplus on hand 
which is called capital. This accumulation is dependent 
upon the excess of production over consumption. 

It still remains true that the prosperity of a nation is 
dependent upon the perpetual use of this wealth in legiti- 
mate consumption. In other words, the condition of 
national consumption, that is, the use of all the surplus 
earnings of a nation, will be an index of the national pros- 
perity. Hence it is the height of economy to encourage 
legitimate consumption of goods. Therefore the legitimate 



284 



ECONOMICS. 



consiTmption of wheat, corn, clothing, furniture, houses, 
and in fact all goods, will be an index of the prosperity of 
the nation. Care should be used to discriminate between 
the large service of goods and the waste of goods. Every- 
thing must be put to its highest possible use if we wish 
to reach the highest prosperity. If a large part of the sur- 
plus earnings of a community passes into savings, it may 
thereby curtail expenditure in such a way as to destroy the 
well-being of the community. While the encouragement 
of saving by individuals in the form of life insurance or 
laying up funds for future use may in the long run lead to 
greater opportunities for the support and production of 
life, yet even this may be overdone to the extent of destroy- 
ing the working funds of the community and detracting 
from its well-being. 

In the United States, enormous consumption of goods 
has as much to do with the prosperity of the nation as the 
excessive industrial power which produced the goods. 
While the opportunity to consume goods must logically 
follow the production of the goods, it is after all the stim- 
ulus to production, and after all the evidence of the well- 
being of the community. The following table illustrates 
the national consumption of certain classes of goods in the 
United States, for the fiscal year 1905. 



Article. 



Production. 



Home Gonsumptio7i. 



Wheat.. 
Cotton . . 
Corn . . . 
Pig iron 



Coal. 



Wool 

Malt liquors, and dis- 
tilled liquors 

Sugar 



552,399,517 bu. 
6,994,281,731 lbs. 
2,464,480,934: bu. 

22,992,380 tons. 
(Calendar year 1904) 

314,562,881 tons. 

295,488,438 lbs. 

1,718,203,292 gals. 
584,888 tons. 



510,985,324 bu. 
2,749,291,082 lbs. 
2,377,202,894 bu. 
16,561,277 tons. 

244,051,103 tons. 
(Bituminous) 
542,062,536 lbs. 

1,694,392,765 gals. 
2,632,216 tons 



ECONOMICS. 



285 



It is evident that the large amount of the consumption 
of liquors must be to a great extent a detriment rather 
than an advantage. And also the waste in the use of flour 
or meat in the home consumption could not be considered 
in an estimate of well-being, but that this produce repre- 
sents the possibility of well-being to the nation. 

Reform in Consumption. 

As consumption influences production, the improvement 
of the economic methods will be more readily made by 
reforming our system of consumption. There is competi- 
tion in buying or consumption as well as in selling, and 
the consumers who compete perpetually for lower prices 
influence manufacturers in making a cheaper article. A 
retail dealer in shoes was one day asked why he did not 
furnish a better quality of children's shoes. " Simply be- 
cause," he said, ^"^the people do not wish to pay the cost of 
their making. Children's shoes are defective in manufac- 
ture to a large extent, and as a child's shoe costs more than 
a grown person's shoe in proportion to the material in it, 
parents are not willing to pay the actual cost of a well- 
made child's shoe. They always ask when shown a certain 
grade, ' Have you not something cheaper ? ' Then the 
dealer says to the manufacturer, 'Can you not furnish me 
something similar to this of a much cheaper grade, to 
supply the demand V " And so the cheaper shoe is made. 

Thus competition in buying is productive of adulterated 
goods in almost every line. Goods are made in these days 
to suit not only the volume of commerce, but also the tastes 
of the consumer. If we demand substantial, well-made 
goods, in which there is no cheat or deceit, we must be 
willing to pay the cost of production with a margin for 



286 



ECONOMICS. 



handling the goods. In other words, we must have healthy^ 
well-fed laborers, working under a high standard of life, 
which means high wages and a fair price for the goods. 
Consumption can influence production to a considerable 
extent. It is not intended here to argue against cheapness 
of articles, for this is a blessing to the poor. The applica- 
tion of modern invention and machinery to the production 
of goods permits us to produce substantial, well-made arti- 
cles at a low price and by fair wages. But the excessive 
cheapness of manufactured articles is to be avoided. 

Sweating System. 
There is what is known as the sweating system, or the 
method of taking articles to be manufactured in the homes 
or in small dingy apartments, on a contract to do so many 
pieces at a certain very low price. The prices paid for 
labor are so low under such circumstances that work must 
be slighted in order that people who consume these goods 
will have a cheap article. In the long run this cheapness 
is a detriment to both consumers and producers, as well as 
laborers. If it yielded an ample return to the consumer 
there might be a grain of sense in forcing the producer to 
grind the laborer to create the cheap article designed. But 
this cheapness is of no benefit to the consumer, because it 
gives virtually an article without service at a low price. 
Consumers scarcely think of this when they go to the 
stores to purchase, with a tendency to beat down the prices 
of goods to the lowest notch, — that is, demanding cheaper 
and cheaper made goods. To avoid this, "consumers- 
leagues" are formed for the purchase of goods made by 
reliable houses where labor is paid full living rates, and to 
avoid the purchase of all sweat-made garments, which are 



ECONOMICS. 



287 



created under the influence of the poverty and wretched- 
ness of low-grade labor. 

Waste in Consumption. 

It is a difficult thing to purchase goods properly in the 
market to satisfy our own immediate wants. Our wants 
are so many and so varied that with limited means we 
must weigh the possibility of satisfying first one, then the 
other. This is especially true among the poorer classes. 
They cannot always tell which they want the most, or if 
they can, in their purchases they frequently fail in getting 
what they want. To be a good purchaser in the market 
with modern competition is to know what one wants, and 
then estimate the ability to pay for it in making the pur- 
chase. 

But having purchased the article, its use for consump- 
tion is even of greater importance. Take, for instance, 
the food that is brought into the kitchen. In the first 
place there is lack of economy in its preparation and in its 
cooking, and finally in its actual consumption. The Amer- 
icans are proverbially an extravagant, wasteful people in 
this respect. It is said they waste enough to support an- 
other population equal to their own. This comes about 
not entirely through carelessness, but through lack of 
knowledge and training in the art of consumption. A 
farmer will leave his implements out in the storm the 
year around, and then complain of hard luck. He will 
leave his cattle without shelter and poorly fed, and then 
wonder why he loses in the business. We waste in clothing 
by our perpetual change in fashion, and we wear our 
houses out long before their time, because we refuse to 



288 



ECONOMICS. 



keep them in proper repair. And so for all that we use in 
life, there is a waste in consumption. 

It is not that we desire to have a small consumption of 
goods, for it is highly desirable that there should be a 
large consumption ; but it is only through economy that 
we are permitted to have a large consumption. If Mr. A 
takes care of one pair of boots he may have sufficient 
wealth to buy a hat or a coat, which he otherwise would 
not be able to purchase, or else invest his money in a 
better way. With economy of the ilour and potatoes al- 
ready purchased, people might purchase in addition apples 
and other things. 

This principle is frequently carried into the process of 
consumption. Business firms seeking to enlarge their 
production and increase their income frequently lose be- 
cause of their excess of expenditures, simply because their 
processes of consumption were imperfect. 

Mr. Bullock, in his Introduction to the Study of Eco- 
nomics, shows that waste of foods may occur in the follow- 
ing ways: First, needlessly expensive foods, containing 
little real nutriment; second, failure to select foods best 
suited to the needs of the family; third, a great deal 
wasted which ought to be used; fourth, bad preparation 
of food, which causes it to lose its nutriment; fifth, the 
immense loss of fuel through badly constructed ovens. 
The author estimates that in this way at least one-fifth of 
all the money spent for foods is absolutely wasted. This 
waste of material could be carried into every department 
of economic life. As business becomes more exact, there 
is greater care in consuming all of the material. The 
by-products in a gas factorj'^ or in a smelter frequently 



ECONO]MICS. 289 

yield a large revenue. The saving of cotton seed, which 
formerly was wasted, adds much to the productivity of 
cotton-fields. The large packing-houses at Kansas City 
are good illustrations of the economy of consumption, for 
every part of the slaughtered animal is saved and turned 
to economic use. 

References: Bullock, Introduction to Economies ; Phillippovich, 
Grundriss der Politischen Oekonomie; Seligman, E. R. A., Principles 
of Economics ; Fetter, Frank O., Principles of Economics. 



-19 



BOOK III. 



EXCHANGE AND INDUSTRY. 



(291) 



CHAPTER I. 

UTILITY AND DEMAND. 

Struggle for Wealth. 
The object of wealth is to satisfy wants, and the ceaseless 
struggle for existence is simply a want-satisfying process. 
We exploit mines for the sake of iron to be used in build- 
ings and implements ; for gold and silver to be made into 
money and ornaments; copper and lead and zinc for 
utility in the industrial arts; we till the soil to produce 
grains, fruits, and cattle for food ; we exploit the forests 
to yield lumber for building purposes ; and we use steam, 
water, electricity, to propel great machines for the trans- 
formation of raw materials into articles of beauty and 
usefulness. The more we have to work with and to live 
for, the more we want ; our desires are never satisfied. 
Increased wealth — that is, an increase of economic goods — 
gives us increased power, and we need larger wealth and 
more means to satisfy this power. 

Utility. 
We desire these economic goods on account of their 
utility, and by utility we mean their want-satisfying power. 
Its only test is actual service. If a person wants an 
article, it is because it has an individual utility. If many 
want the same article, it has a social utility. The utility 
of goods is what brings them into market and disposes of 

them wherever they perform the greatest service, and thus 

(293) 



294 ECONOMICS. 

goods are distributed among tlie people wherever thej are 
demanded and in proportion to the demand. 

Demand Schedule. 
If a single individual and a single commodity on the 
market are considered, it will be found that desire for 
the goods diminishes as the supply increases. While there 
is an endless variety of wants, there is a limit to each sep- 
arate want, and it diminishes with every increase in the 
amount of the thing which supplies it. There is in each 
separate case a diminishing utility respecting every article. 
There is in the rational desires of every person a law of 
satiable desire. The total utility of an article or of a com- 
modity on the market, which is the same as the total want- 
satisfying power, increases with every increment of a per- 
son's stock in it; but it does not increase as fast as the 
stock increases. Thus, four horses will give a greater 
total utility than two, but the utility is not doubled by 
the purchase of the two additional horses. If the pur- 
chaser continues to add to his stock, each separate horse 
of the same grade will be valued less than the former, 
until he reaches a place at which he will not pay anything 
for a horse, but would keep him if given to him. The 
last increment which he is just induced to buy is called 
the marginal utility. Thus, the marginal utility of a 
quantity of anything diminishes with every increase in 
the amount which he already has. (See illustration of 
Marginal Utility, Fig. I.)* 

*NoTK. — The diagrams used In Illustrating demand, marginal utility, value, etc., 
are suggested by the advocates of mathematical economics, such as Cournot and 
Jevons, and so extensively used by Marshall and adopted by Ely, Commons, Hadley, 
and other American economists. It Is the universal method of applying mathematics 
to economy, and is used in this work for Illustration and with no Idea of demon- 
stration. 



ECONOMICS. 



295 



"^ 




^ 






g 












f 


^"'■^v^ 


d 


^^^"^ 


^^ 



m 



Fig. I. 



Let ah, in Fig I, represent the quantity of satisfaction 
obtained from the first increment of food, and ac from 
that of clothing. Then let the diminishing scale of utility 
of food follow the line hrn, where the actual food-supply 
will be represented by the line ae. At the point e, where 
no more food will be required for any purpose whatever, 
em will be called the marginal utility. Let ch be the 
diminishing line for the clothing scale and the actual sup- 
ply represented by ah. The marginal utility in this case 
is gh. It is easy to see in this case that though the first 
increment of food is much greater than that of clothing^ 
yet the marginal utility of clothing is greater than that 
of food, on account of the increased service it performs to 
humanity. If the line ck extends to /, and ai represents 
the actual supply of clothing, fi will represent the mar- 
ginal utility of clothing. If this is brought about by an 
increased desire for clothing relative to food, the marginal 
utility of food will rise from me to nd; then the marginal 
utility of food and clothing is the same. When two 



296 



ECONOMICS. 



articles are compared in this way, each individual con- 
stantly estimates the want-satisfying power of each article 

demanded. 

Law of Demand. 

Each individual thus has his demand schedule for every 
article. Give an intelligent child a quarter and send him 
to a toy store and he will spend hours looking over various 
articles, estimating which will give him the largest amount 
of satisfaction for the money which he has to spend; for 
demand in this case, as in all other cases, represents the 




Fig. II. 

ability and willingness to pay a given price for any article 
offered in the market, and each individual will take an 
amount of any given article until the demand for that 
article is met by a greater demand for some other article. 
In Fig. II, lay off on the line AX the distances Am, 



ECONOMICS. 



297 



An, Ao, Ap, Aq, Ar, As, and At, respectively representing 
the amounts of a given article demanded by a single person 
at various prices. Then erect perpendiculars ma, nh, oc, 
pd, qe, rf, sg, and th, representing prices corresponding' 
respectively to the amounts demanded. Then the person 
will take Am goods at 7na valuation, An goods at nh val- 
uation, etc. If a curve be passed through the extremity of 
these lines it will be called a demand curve, which grad- 
ually approaches the line AX as the want-satisfying power 
of the article falls, and approaches the line AY as, the 
want-satisfying power rises. If the value of hats falls it 
may not affect every one, but will affect a few people at 
least, and the demand for hats will increase. A fall in the 
value of sugar will have a tendency to induce Mr. A to 
purchase more, a rise in the value will cut off his demand. 
Every decline in valuation on the market will be met 
with a larger sale, but the sale is not necessarily propor- 
tionate to this fall. There is not an exact ratio between 
a fall in prices and an increased demand. A fall of one- 
tenth in price may increase the sales by only one-twentieth, 
or it may increase them one-fourth, or it may even double 
them. 

The law of increased demand may be stated as follows : 
A decrease in the supply, the demand remaining the same, 
will cause the values to rise ; an increase in the demand, 
the supply remaining constant, will cause values to risej 
an increase in the demand with a corresponding increase 
in the supply will permit values to remain unchanged; a 
decrease in the demand, the supply remaining constant^ 
will cause jorices to fall ; an increase in the demand and a 
decrease in the supply will cause prices to rise rapidly; 



298 



ECONOMICS. 



and in every case tlie demand and the supply tend to seek 

an equilibrium. 

Market Demand. 

Other things being equal, the single demand of a person 
is a fair representative of the whole market. Wliat one 
individual is doing in satisfying his wants, thousands are 
doing; and very often they want the same article at the 
same time. It is hardly fair to say that the average de- 
mand in a given market is the sum of the individual 
demands, but it is true that the greater amount to be sold 
the smaller will be the price at which it will find purchas- 
ers ; and yet the universal demand for an article by many 
people increases the intensity of the desire and increases 
its value. 

Y 



D 


.p" 




\ 


..p 






V 


■-t 






\ 


\k 



em z 

Fig. III. 



-X 



ECONOMICS. 299 

To generalize Fig. II, we have Fig. Ill, in whicli we 
let An on the line AY represent the demand, and Am on 
the line AX the supply. Erect vertical lines from m and n, 
and where they meet the point p will represent the price 
or valuation, for this point will illustrate the place where 
exchanges take place. Suppose now that Ao represent the 
demand and the relative supply increased to Az and j9', 
the intersection of the lines erected at o and z respectively, 
will be lower than p. Again, suppose As represent the 
supply, and Ae represent the demand, and p" will be the 
point where exchanges take place. Now pass a curve 
ihrongh p' \ p' , and p, and we have a demand curve, which 
represents the operation of every market in which trans- 
actions take place. 

Coxapetition and Demand. 
Competition goes on in never-ceasing activity, tending 
to level the prices of all commodities of a similar nature. 
Each demand schedule is continually leveled or merged 
in the general market demand. There is also another 
competition going on in the market, between articles of 
a different kind. If corn becomes high, people will use 
wheat, and vice versa. Thus, competition is observed 
everywhere among substitute articles. When we measure 
men's desires and calculate the influence of each demand 
schedule for each separate article, we see that this method 
of substitution is universal, and that the appearance in the 
market of any commodity which can be used as a substitute 
for another already in use will lower the price of the latter. 



300 ECONOMICS. 



CHAPTER II. 

VALUE. 

Definition* 

Value is a relative term, which is applied to different 
articles to represent their degree of desirability. As it 
is the desire for economic goods which makes them valua- 
ble, and as utility represents the want-satisfying power 
of goods, value has been called the measure of utility; 
and in one sense this is true, for value always accompanies 
utility although it is never identical with it. 

The various uses of the term value by economists, and 
the popular conception of the term, have led to great con- 
fusion. Even able writers have been often careless in its 
use. It is stated that at one time the celebrated Sydney 
Smith joined a club for the purpose of studying political 
economy. His sole purpose, as he stated, was to find out 
the use and true meaning of the word value; but after 
remaining in the club for some time he finally withdrew 
because, as he said, the club knew no more on the question 
than he did. Owing to the controversy on this subject, 
it was with a sigh of relief that some economists welcomed 
the work of Stanley Jevons, which discarded the use of 
the term altogether. In the light of recent discussion it 
seems very odd that John Stuart Mill should have stated 
in 1848 that there remained nothing for him or any other 
writer to state concerning the laws of value. Since that 
time modern economists have accepted the loose usage of 



EcoisroMics. 301 

the word, giving it their own peculiar meaning. Recently, 
however, the Austrian economists have reopened the sub- 
ject, and given a clear and satisfactory analysis of value. 
This discussion has given evidence of the differences of 
opinion on the subject. 

Differences of Opinion. 

Much of the difficulty in modern discussion has arisen 
from misinterpretations of loose statements made by 
Adam Smith. In his Wealth of Nations (Bk. I, Ch. IV) 
he states : " The word value, it is to be observed, has 
two meanings, and sometimes expresses the utility of some 
particular object and sometimes the power of purchasing 
other goods which the possession of that object conveys. 
The one may be called value in use and the other 
value in exchange. The things which have the great- 
est value in use have frequently little or no value 
in exchange; on the contrary, those which have the 
greatest value in exchange have little or no value in 
use. !Rothing is more useful than water; it will 
purchase scarcely anything, scarce anything can be 
had in exchange for it. A diamond, on the contrary, has 
scarce any value in use, but a very great quantity of 
goods may frequently be had in exchange for it." While 
it was evidently not intended by the author to divide all 
values into two great indeiDendent comprehensive classes, 
he intended to point out two separate uses of the term. 
Perhaps his greatest error is found in his misconception 
of the- term utility. In an economic sense a diamond is 
very useful, because men desire it and use it, although 
water may be more beneficial. Whisky and beer are use- 



302 ECONOMICS. 

ful, although thej may not be beneficial. Economic value 
rests upon the use of articles, and the use depends upon 
their desirability. 

Free Goods and Economic Goods. 
A discrimination should be made between economic 
goods and what are termed free goods. Air and light 
are useful and beneficial, but they are provided in such 
great quantities and without any effort on the part of man 
that they are said to have no value. Water is sometimes 
classified in the same category, but its scarcity and its en- 
larged use in supplying cities and in irrigation have devel- 
oped in it an economic quality. The only goods that we 
economize or about which we have economic care are those 
which are just sufficient to supply our wants or insufficient 
for that purpose; consequently, the free gifts of nature, 
which are bestowed in such abimdance as to be in no sense 
objects of care to man, are said to be valueless. Hence 
it is, if no want is created there is naught to be satisfied^ 
and consequently there is no utility, and if there is no 
utility there can consequently be no value. 

Value an Index of Utility. 

If utility is the want-satisfying power of goods, value 
is a sort of index, expressive of the variations of utility. 
It is the valuometer which measures the intensity of desire. 
Hence it is that value changes with utility, increment by 
increment, and this value indicates the rise and fall of 
utility. However, the sum total of utility is not equivalent 
to the sum total of value, any more than the sum total of 
the readings of a thermometer during the day will meas- 
ure the sum total of the heat in a given mass of water 



ECONOMICS. 



303 



during the same period. Both utility and value are rela- 
tive terms, and the changes in utility are recorded by the 
changes in value; nevertheless, the utility of the mass of 
a given good may increase while the value of the mass 
may decline. 



m 
n 

A 



[ 


k 


k 


z 








\.. 


t 










X 












\ 


A( 




c 


c 


1 ( 


i 1 


t 

c 


J 



X 



Fig. IV. 

Let us illustrate these principles by Fig. TV. Let the 
base AX represent the quantity of wheat to be had for 
all purposes. Let the vertical line AY he the want-satisfy- 
ing power of this mass. Let Ab represent the first incre- 
ment, used for sowing wheat, he for making bread, cd for 
feeding horses, de feeding cattle, etc., (each increment 
supposed to represent the want-satisfying power.) Let 



304 



ECONOMICS. 



hx represent the want-satisfying power of the first incre- 
ment, cy of the second, dz of the third, etc. If we extend 
a curve through the extremities of these lines we shall 
have a curve of valuation as well as an utility curve, the 
value of each separate increment varying as the utility of 
each separate increment. The sum total of the utility 
will be found by taking the sum of the rectangles Ax, hy, 
cz, etc. Suppose now that es represents the last want- 
satisfying power of wheat. ]S[o more wheat will be pur- 
chased or be desired for any purpose whatever. This will 
represent the value of the last increment; it will also be 
the utility of the last increment: but as the value of the 
mass is measured by the value of the last increment multi- 
plied by the number of increments, the total value will be 
measured by the rectangle Aesm,, which is much less than 
the figure AesY. This occurs from the fact that of any 
article in the market the value of the entire mass will be 
governed by the lowest valuation in the market. 

Theories of the Cause of Value. 

There are many theories as to the cause of value. 
First are those which teach that labor is the cause of value, 
and that articles are valued in the market according to the 
labor it has taken to produce them. This theory was first 
propounded by Ricardo, and subsequently defended by Bas- 
tiat and Karl Marx. It is true that labor has much to do 
with the increase or decrease in the value of goods, but 
it cannot be taken as the primary origin of value. If this 
were true, that the value of an object is determined by the 
labor spent in its production, then it would follow that 
value would be unchangeable; on the contrary, we see 



ECONOMICS. 



305 



that the values of articles constantly change. Machines 
and implements that cost excessive and long-continued 
labor are finally rendered valueless because they are no 
longer desired for service. The same idea is expressed in 
the exchange of articles in the market at the same price, 
which cost different amounts of labor. If labor were the 
cause of value, articles that cost the same amount of 
labor would exchange equally; and again, if labor were 
the cause of value, there would be no value without 
labor, — yet things which are of great value are found or 
discovered without any particular labor. But labor itself 
is valuable, and we could not estimate it if it were the sole 
cause of value in other things. It is evident that this 
theory, formerly accepted, is untenable. 

Another theory is called "the diffioulty-of -attainment 
theory." But it presents a condition of value, and not 
a cause. It hinders us from placing desirable goods upon 
the market, and thus makes a scarcity in the market and 
the value of the articles rises; that is, the demand re- 
maining the same, the supply becomes deficient and values 
rise. But suppose no person wanted these goods, however 
difficult of attainment, they would be of no value. 

Closely allied to this is the scarcity theory. It simply 
asserts that because these goods which are furnished us 
gratuitously and in abundance without labor have no value, 
other goods are valuable because they are scarce. It is true 
that if desirable goods become scarce their value will be 
enhanced, but scarcity may not be called the primary cause 
of value. Frequently there are goods in the market, very 
scarce, but no one wants them and they have no value. 
—20 



306 ECONOMICS. 

utility the Cause of Value. 

Tlie last group of theories to be mentioned is that of 
those who say that utility is the cause of value. Taking- 
utility in the sense of satisfying wants, this is a correct 
theory, for it is the want-satisfying power of goods which 
makes them valuable. This want-satisfying power and the 
demand remaining constant, goods will increase or decrease 
in value in accordance with their difficulty of attainment^ 
just as they are scarce or plentiful in the market. As we 
desire goods very keenly their value rises, and our desire 
is greatly increased if we find them insufficient for our 
wants; their quantity, moreover, is more or less insuffi- 
cient in accordance with the ease or difficulty with which 
they are multiplied. 

Objective and Subjective Value. 

It is convenient to classify value into objective and sub- 
jective, for a better understanding of its nature. When 
we consider personal well-being, value is considered to 
be subjective; but when we consider some technical or 
mechanical result without any immediate reference to 
personal well-being, then we have objective value. The 
latter may again be divided into two divisions, — the first 
represented by the amount of potential energy in material 
goods, and the second in the power of exchange. These 
represent the relation of potential energy and relative 
capacity between different articles. To illustrate, let us 
take the subject of coal. The subjective value of coal 
is determined by the amount of satisfaction I get in 
warming myself before the fire. The objective value of 
coal will be the amount of power it creates through its 



ECONOMICS. 



307 



heating capacity; and in the other objective sense, the 
amount of economic goods it will exchange for in the 
market. In economics we have nothing to do with the 
first two divisions of objective value. We may not con- 
sider the heating capacity of coal, the resisting power of 
different kinds of wood, the feeding power of corn, nor 
the life-giving power of sunshine; we have to do with 
but one objective phase of value, and that is exchange 
value. The power — or capacity, if we may say this — of 
objects in exchange, is economic value. 

It will be observed, however, that this phase of objective 
value rests upon personal or subjective value. In other 
words, exchange value rests upon men's desire for goods 
and their personal estimates of what goods are worth in 
the market. Thus will value, which represents power or 
capacity in exchange, rest upon man's attempt to satisfy 
wants. Wherever there is a want to satisfy, there value 
arises. If a surplus occurs so that want is impossible, or 
if desire ceases on account of satiety, value declines and 
tends to pass out of existence. But wherever a want 
exists, — a lack of something, — there is an accompanying 
desire to find the thing needful. Therefore, both utility 
and value rest upon the basis of the wants of man. The 
degree to which wants are felt depends upon the extent 
of the supply needed before the point of satiety is reached, 
and also upon the common supply in relation to the need; 
consequently we must come to measure all wants relatively 
by the laws of supply and demand. By the demand for an 
object is meant the desire for it, accompanied by the will- 
ingness and ability to pay for it in goods, services, or 
money. 



308 



ECONOMICS. 



Intrinsic Value. 

The tendency in people to insist that the physical 
qualities of an object determine its value, turns the whole 
matter into objective relations, as there is a tendency to 
believe that objects carry with them some inherent quality 
that makes them valuable. So far as they satisfy the 
wants of man this is true, for it is the quality of goods 
that makes them desirable, and by quality we mean their 
capacity for service or pleasure, and this makes them de- 
sirable and hence valuable. The so-called intrinsic value 
of an article means nothing more than its capacity to 
satisfy desires. The intrinsic value of a hat is simply 
hat-service or hat-satisfaction ; intrinsic value of money is 
its exchange value; intrinsic value of a gold watch is its 
service and beauty. The term is more frequently used 
in respect to money than in any other way. Thus, gold 
and silver are said to have intrinsic value. For the pur- 
pose of exchange, the desire for a gold dollar is just the 
same as the desire for a paper dollar, for the two will 
perform the same service, — no more, no less. Hence it is 
that the intrinsic value of an article must rest upon de- 
sire alone, and that simply means that it is subjective. 

ITow the real point at issue is that gold can be used for 
some other purpose than that of mere exchange. Its 
market is large and its demand is constant for a thousand 
purposes, while the paper dollar can be used for only 
one purpose, or possibly two, because the paper might be 
used in the manufacture of other paper; hence the in- 
trinsic value of paper money is nothing, or very small, 
while the intrinsic value of gold, being universally desira- 
ble, is very large. We reach the conclusion, then, that 



ECONOMICS. 



309 



all values in the ultimate must be traced to the subjective 
conditions. Primarily, gold, silver, lead, copper, iron, 
tin, will be valued according to their service and satisfac- 
tion, and of course their service and satisfaction will de- 
pend, secondarily, upon the qualities which they possess. 

References: Smart, William, Introduction to the Theory of 
Value; Marshall, Principles of Economics; Commons, Distribu- 
tion ; Ely, Outlines of Economics ; Wieser, Fred von, Natural Value ; 
Seligman, Principles of Economics. 



310 ECONOMICS. 



CHAPTEE III. 



PRICE. 



Definition. 
Price is tLe value of an article measured in the terms 
of money. As all commodities are measured in terms of 
one called money, a general rise in prices is indicated by 
a general fall in the value of the measuring unit. As all 
values are relative, there could not be a general rise or 
general fall of values, for if articles a, h, and c have their 
values represented by 10, 20, and 30, it means that their 
ratios of value are 1, 2, and 3. If now the value of each 
is doubled they will become 20, 40, and 60, or if it is 
reduced to 50 per cent, they will be 5, 10, and 15. In 
each case the ratio of 1, 2, and 3 remains. There may be 
a rise or fall in the price of one or more articles in rela- 
tion, to other articles without any necessary change in the 
money value, but when all prices go up or down it is an 
indication that the values of the articles of the group have 
changed their relation to the measuring unit called money. 

Manner in which Market Price is Established. 
We have already noted, in Chapters I and II, the nature 
of subjective value and the individual-demand schedule. 
The marginal demand and the marginal utility are now 
understood, . and the relation of marginal utility to value 
and price have been theoretically explained. Ii now re- 
mains to be determined how, from a practical standpoint, 



ECONOMICS. 



311 



prices are established. Remembering that the law of 
supply and demand indicates an equilibriimi, and that 
in individual cases the demand decreases with the lowering 
of the marginal utility, let us enter an ideal market, and 
by illustrations see what actually takes place between indi- 
viduals. 

Suppose A wishes to sell a horse, the only one of its kind 
in the market, and B is the only purchaser. Suppose A's 
minimum price is $30 and B's maximum is $25. If the 
two parties hold to this there will be no sale; A would 
be willing to take $30 for the horse, but no less ; B would 
be willing to pay $25 for the horse, but no more. There 
are other ways in which he would rather invest his money 
rather than pay a dollar more than $25 ; A knows no othdr 
way more to successfully invest his money than at the 
price, $30. 

Second proposition: Suppose A's minimum price is 
$30 and B's maximum price is $40. That is, rather than 
not get the horse, B would pay $40 ; rather than not sell^ 
A would take $30. At first each man's proposition is un- 
known to the other. A desires to get all he can for the 
horse ; B wishes to purchase it at the smallest price possi- 
ble. There will be a sale, the price being fixed between $30 
and $40, according to the skill of buyer or seller. This is 
a simple illustration of what is known as "the haggling 
of the market." As a third case, suppose A's minimum 
price is $30 and B's maximum price is $30; there will 
probably be a sale at that figure. It may happen that such 
a case actually occurs. 

Again, suppose xbere are three purchasers of horses, 



312 ECONOMICS. 

willing to give $30, $35, and $40, respectively, for the 
horse, and there is only one horse of the kind in the 
market. Then A, B and C bid for the horse. It is a 
case of cbmpetition in buying, but not a competition in 
selling. A ceases to bid above $30, B ceases to bid above 
$35, and the difference is settled between C and the seller. 
If C is a shrewd buyer he will not pay much over $35, 
because he has discerned that the seller would be willing 
to take $30 rather than not sell. 

Suppose now there are three horses in the market and 
three purchasers, and that A will sell at $30 mimimum, 
B at $35 minimum, C at $40 minimum. D will pay $35 
maximum, E $35 maximum, and F $40. ]^ow if the 
three horses are similar and are sold in the open market, 
a fair price will be fixed for the horses. F does not pro- 
pose to pay more than E or D. And D expects to pay as 
much as either E or E. The sale takes place. The price 
of the horses will be fixed between $30 and $40, and as D 
and E offer each $35, and there is one horse offered at this 
price and one at less, the majority of buyers and sellers 
would indicate a price at $35 whether the horse is sold 
or not. 

This is an elementary case of buyers and sellers. If we 
enlarge this market, and have many buyers and many 
sellers, we shall have universal competition in buying and 
selling in the open market; and it is by this method that 
prices are finally fixed. Where a series of buyers and a 
series of sellers are competing, exchanges will take place 
where each individual sees a gain. Every individual will 
prefer a greater gain to a less, and the price is established 
somewhere between the minimum of the seller's subjective 



ECONOMICS. 



313 



valuation and the buyer's maximum valuation, or between 
the subjective valuation of the first of the successful and 
the first unsuccessful buyers where only competition takes 
place; or, in competition of many buyers and sellers, be- 
tween the subjective valuations of the last buyer and tlie 
last seller. In this manner a market price is established 

for all bidders. 

Market Interferences. 

In any market the supply of a given article is the amount 
offered at a given price, and it is different from the stock 
of the article on hand. This discrimination must be 
kept carefully in mind. The supply of an article always 
decreases with a decrease in price and increases with an 
increase in price. Now a market is a place where prices 
are determined by competition, and the market demand 
for an article is the amount that will be taken at any given 
price. It diminishes as the price increases. It is differ- 
ent from mere desire. It represents the willingness and 
ability to take a certain quantity of a given article at 
a given price. A monopoly destroys the market, and prin- 
ciples laid down for the establishment of a market price 
can prevail only under free competition. Under our mod- 
ern system of competitive trading, the price at which the 
demand is equal to the supply will be the market price 
of the article. 

Take, for instance, the example of cotton. Suppose it 
be selling at eight cents in the New York market. So long 
as the demand equals the supply, the price will remain 
at eight cents. If a large stock is thrown upon the market 
the sellers will begin to fear that they cannot dispose of 
their stock, and will offer to sell for less. The buyers, 



314 



ECONOMICS. 



observing this, each strives to obtain it at a lower price, 
and so two groups of people strive to fix on the market 
rate, — the bulls and the bears. In the Berlin Stock Ex- 
change the equalizing of the supply and demand and the 
fixing of a market rate is left to a commission. The 
committee settles upon the price which will secure the 
maximum number of transactions. In an ordinary market 
thi^ settled price is fijted by the self-interest of groups of 

,D 




4 5 6 7 

Figure F. 



-X 



buyers and sellers acting under free competition and in- 
dependently. - There are interferences in the establish- 
ment of this market through corners of market valuations, 
and through custom by which prices are sometimes fixed 
for a long period of time, and finally through combinations 
of buyers and sellers in fixing the price. 



ECONOMICS. 



315 



Referring again to the market of copper for a single 
day in Xew York city, let us suppose in Figure V that on 
the line AX we have 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, as repre- 
senting prices of copper demanded in quantities ranging 
from lOz, Qy, 8x, 7iu, 6u, 5v, etc. ISTow since the quantity 
tends to increase as the price decreases and diminish as 
the price increases, if lOx equals 25,000 pounds we shall 
find there will be demanded that amount at 10 cents, 30,000 
at nine cents, 35,000 at eight cents, 40,000 at seven cents, 
and 60,000 at six cents. 
Y 




r^ y y y 

Figure VI. 

Generalizing this as in Figure VI, at a price Ay' there 
will be demanded y'x', and at the price Ay there will be 
demanded yx pounds, and the price Ay" there will be de- 
manded y"x" pounds. If a curve DD be passed through 
X, x\ and a:", we shall have represented the demand curve, 
illustrating the rise and fall of prices and the amount of 



316 



ECONOMICS. 



goods demanded at the different prices. Probably the 
whole stock in the market will be offered at ten cents if 
there are not sufficient purchasers. At nine. cents a little 
will be withheld from the market, more at eight cents, 
still more at six. If 90,000 pounds be the stock, only. a 
part will be thrown upon the market in a single day. 




4 5 6 7 
Figure VII. 



X 



Laws of Supply. 

Xow suppose in Fig. VII we let 1, 2, 3, 4, 5, 6, 7, 8, 9, 
10, on the line AX represent the respective prices at 
which copper is offered in the market. Suppose there are 
15,000 pounds offered at six cents, 25,000 at seven cents, 
and 35,000 at eight. Then we shall find that as the price 
increases from six to seven the amount offered will increase 
from 15,000 to 25,000 pounds, and as the price increases 



ECON^OMICS. 



Si? 



to eight the amount offered will be 35,000 pounds; but if 
the amount demanded at eight cents is 35,000, the de- 
mand curve will also pass through the point y. At this 
point the market value will be fixed and 35,000 will be 
offered at eight cents and the remainder will be held for 
a rise in price; that is, the point of intersection of the 
demand curve and the supply curve will be the point of 




y y 

Figure VIII. 

the market price. In the case of perishable goods the 
supply curve will be represented by a straight line, as 
the whole amount must be offered in a given time, regard- 
less of price. Generalizing, we have the law illustrated in 
Fig. VIII, the point of intersection of the supply curve 
SS with the demand curve DD at x's' represents the point 
of market price and Ay' will represent the market price. 



318 ECONOMICS. 

Normal Price. 

The normal price of articles tends to approximate the 
cost of production. Through competition, prices of staple 
commodities are proportionate to the cost of producing 
them. If the market price of an article is not sufficient to 
pay the cost of making, attention will be turned to other 
products, such as copper, lead, gold, silver, wheat, corn, etc. 
There is always a tendency, on the other hand, for high 
prices to be forced down by withdrawal of demand from 
high-priced articles wherever substitutes can be obtained. 
While temporary market prices are determined by traders, 
the fundamental basis of prices will be found in manufac- 
turers, and we shall always find then two market centers, — 
the one the retail and the other the wholesale. 

The manner in which the normal price is established is 
through an equalizing process based partially upon the 
cost of production and on supply and demand, and the 
transition from normal price to market price is generally 
a very clumsy process. In the first place, it is difiicult to 
determine the cost of production in any given line, for 
the expense varies and it is a question Avhether the aver- 
age expense, the maximum expense, or the minimum ex- 
pense should be noted. If there are several establishments 
producing the same line of goods, some of which are more 
favorably located than others, those more favorably located 
will be able to produce goods at a cheaper rate, and when 
the demand is limited, so that the more favorably located 
institutions produce all the goods necessary, these richer 
establishments will set the normal price; but when these 
more favorably located establishments are not able to fur- 
nish the entire output, the price will be set by the least 



ECONOMICS. 



319 



favorably located in the entire number. Perhaps the 
average expense will be estimated by taking, year in and 
year out, the entire product and averaging the price 
throughout the given period. 

At best, the relations between cost and price are ob- 
scure, on account of by-products. Thus, in the production 
of cotton we have cotton seed, which goes a long way 
toward the cost of production of the cotton; and in some 




instances coke, which is obtained in the manufacture of 
gas, receives such a favorable market as to greatly reduce 
the cost of the gas. There is a steadiness, however, to all 
manufacturing industries, hence there is a slowness of 
investment. It is not easy to shift investment of property 
from one place to another, hence the process of change of 
investment is very slow. Manufacturing industries may 
enjoy a monopoly for many years before competitors 



320 



ECONOMICS. 



discover the real marginal profits. Railroads may en- 
joy monopolies for years though threatened with compe- 
tition. E'evertheless, with all interferences, there is a 
tendency in all prices to become normal in spite of legis- 
lation or combination, and where we have normal prices 
the amounts of production and consumption tend to equal- 
ize each other. 

In Fig. IX,* let Ay on AX be the normal price, and yx 
the quantity which will be ordinarily produced and con- 
sumed at that price. There will be no permanent demand 
above this. Then let Ay' represent the minimum cost of 
production of the most advantageously situated producer. 
All permanent supply ceases below this. The total de- 
mand or price will extend from Ay" to Ay. The total sup- 
ply or cost from Ay to Ay'. At the point where the pro- 
duction and consumption equalize each other, viz., at the 
point y, the normal price will be determined. 

Limitation of Prices. 

In some instances prices are limited by law, as in the 
case of the legal rates of gas established in Massachusetts, 
"New York, and Maryland. By act of the legislatures of 
'New York and Maryland, gas will not cost over $1.25 per 
thousand cubic feet. Monopoly cannot extend beyond this 
price. In former times it was an object of great contro- 
versy to determine what was a just price or a fair price. 
Many attempts have been made to limit prices by law, most 
of which have failed. The attempts to establish maximum 
freight rates have proved to a certain extent failures 
where they have tried to make these rates fixed. Where 
they have been placed in the hands of commissions, with 

* See Hadley, p. 90. 



ECONOMICS. 



321 



the mandate of the law insisting only on reasonable rates 
being charged, something has been accomplished to regu- 
late these rates. In many instances medical fees are lim- 
ited by custom. 







E 


£* 






~~--^o 








K 


--^ 










^i::^^ 


D 












^^ 2^ 












Y 



^ F F' H ^ 

Figure X. 

Cost of Production, and Normal Price. 

In Fig. X,* let AX equal the production of an indefi- 
nite quantity of some commodity of increasing returns, 
then BZ a line of diminishing cost per unit of the product. 
Let AC represent the greatest utility of the product, and 
CY the line of diminishing utility, ^ow if the product 
should exceed AH, the value of the marginal product will 
be less than the cost of producing the same. That is, the 
value of the product will be A VDH, while the cost will be 
ABDH, and the cost will be greater than the value of the 
product by the triangle BVD. T^ow let us limit the pro- 

• See Commons, p. 126. 
—21 



322 ECONOMICS. 

diiction to the point F, then the value of the product will 
be AFEB, and the cost will be AFKB. The profit will be 
BKE. Again, if the limit of the point of production be at 
F', then the value of the product will be AF'E'B', and the 
cost will be AF'K'B'. As the tw^o triangles BOB' and 
K'OE' are just equal, the cost in this case just equals 
the value of the product. 

References: Commons, Distribution of "Wealth; McFarlane, 
Value, Price, and Distribution ; Hadley, Economics ; Mill, Princi- 
ples. 



ECONOMICS. 323 



CHAPTER IV. 

MONEY. 

Beginnings of Exchange. 

When the division of labor came aboiit, and each indi- 
vidual sought to perform certain services for himself which 
he could do better than others, he accumulated a surplus 
of goods which he exchanged for others. That is, when 
he had more of a certain line of goods than he actually 
needed, he exchanged the "relatively superfluous for the 
relatively necessary." In this exchange he disposed of 
those goods of which he had an abundance for those of 
which he had a deficiency. In this way barter sprang up. 

Early History of Money. 

Money was not devised by the thoughtfulness of any one 
brain, but came into being simply by use. The practices 
of nations in primitive times, as well as in present times, 
reveal more clearly to us the nature of money; and the 
presentation of facts concerning these tends to show us 
how far our theories are correct and to be depended upon. 

Money came into use through the economic process of 
exchange. At first, one man produced all that he used, and 
exchanged nothing with his neighbor ; there was, of course, 
no need of money. But as time passed on and he traded 
his surplus products for those surplus products of others, 
he entered into the field of barter. But, as exchange ex- 
I tended and grew more complex, there came to be a certain 



324 ECONOMICS. 

commodity which measured the value of all other com- 
modities, and this we call money. This development of 
exchange led to the use of different kinds of money. First, 
it might have been ornaments used as money. Finally, 
the metals were used ; first the low-grade metals and then 
the high-grade metals. 

The development of exchange led to the use of more and 
more valuable metals, and more and more valuable things 
to exchange. The accumulation of wealth led to the use of 
a higher and more valuable medium of exchange, the 
standard of measuring value. 

Thus it is that money in its different characters and 
capacities is, in one sense, an index of civilization. In a 
low grade of civilization, where the standard of living is 
low, where the accumulation of wealth is not great, we 
find a medium of exchange of very little value. Conse- 
quently the lower and baser metals, such as iron and 
copper, or such ornaments as shells and beads, could be 
used as money among savage tribes. Iron, copper, bronze, 
tin, and silver, each one in its turn, has been the chief 
medium of exchange of tribes .and nations. But prior 
to the use of money, barter represents the earliest form 
of exchange. 

Barter is the exchange of commodity for commodity. 
Exchange itself has been called by Mr. Jevons, "the bar- 
ter of the comparatively superfluous for the comparatively 
necessary"; meaning, of course, that one man will trade 
those things in his possession which he least desires for 
those things in the possession of others which he desires 
more, and which the others desire less. Consequently 
both parties are benefitted by the barter. 



ECONOMICS. 



325 



Barter may take on several different forms: as, the 
exchange of commodity for commodities — the trade of 
potatoes for sugar; second, the exchange of commodities 
for services — a day's labor for a sack of flour ; third, the 
exchange of services for services — ^you work for me while I 
harvest my crop, and I'll work for you while you harvest 
yours. Such are the formulas for barter. To a certain 
extent we find remnants of these ancient forms, and they 
tell us of the day when there were no other methods of 
exchange than these. 

There are indeed many difiiculties and inconveniences in 
barter, and the chief difficulty of it is that there must be 
valuation of the bartered article in terms of every other 
article in the market. So that for the exchange of 100 
articles there may be 4,590 separate measures of value. 
Thus, the hat must be measured in terms of the coat, 
and the coat in terms of potatoes and corn and flour, and 
so on. Another instance of the difficulty of barter is the 
indivisibility of articles. A tailor has a coat which he 
has made, with which he desires to buy groceries and 
hardware; doubtless he gets the articles which he needs 
from several different persons, but the coat cannot be well 
divided ; consequently he cannot trade with several differ- 
ent persons until he can find some opportunity for ex- 
change. 

So, also, of the payment for services : the person who 
works a day or a week or a month must be able to obtain 
in pay the articles which he desires, but as soon as he gets 
them he must look around for some one to take them in 
exchange for those goods which he wishes. And again, it 
is a cumbersome method of exchange; a process which 



326 ECONOMICS. 

would apply to a slowly moving community, a slowly de- 
veloping civilization ; a people in whom is found no prog- 
ress ; and that is one reason why the kind or class of coin 
used represents the rapidity of progress of a nation. 

I have stated that the complexity of trade leads to 
the primitive use of money. Thus, primitive money was 
generally some well-known commodity, something that 
was universally produced and universally admired within 
the limits of the tribe or tribes among which it circulated. 
Worthless things are not usually chosen as money. In the 
natural history of its development, doubtless in very early 
times, things that we might call worthless, such as the 
articles of personal adornment, were used as money; but 
they satisfied human desire, and that is what makes things 
valuable. Value rests not on the thing itself, but in its 
capacity to satisfy human wants. Value is more subjective 
than objective. Thus in the hunter-fisher stage we find 
peltry and other productions of the chase were used as 
money. In this rude state of civilization the products 
of the chase would be the natural measures of value, on 
account of their permanent value caused by their universal 
desirability as clothing. Hence the skins of animals be- 
came one of the earliest forms of currency. ISTot only the 
Oriental nations, but the northern nations of Europe, as 
well as the American Indians, have used the skins and furs 
of animals as rude currency. In this respect the early his- 
tory of the Hudson Bay Company with the IsTorth-Ameri- 
can Indians is exceedingly interesting. The different furs 
or skins of animals were represented at different prices^ 
and they bought flour with the beaver-skin and the marten- 
skin. One beaver-skin was supposed to be worth two shil- 



ECONOMICS. 



327 



lings and it represented two martens, and so on ; and these 
skins were exchanged for clothing and food according to 
their real value. 

If we advance one step higher in civilization and come 
to the currency of the pastoral age, we shall find that 
sheep and cattle formed the chief money of the peoples. 
Even among the ancient Greeks we find the payment in 
oxen rather than in coin. 

Our word ''fee" has an interesting history: it comes 
from the Anglo-Saxon " feoh," which means both money 
and cattle, or a kind of treasure, so that the cattle 
were in this period the medium of exchange. Likewise, 
slaves were used in the same period, exchanged for goods, 
and bought and sold as a measure of value. In both of 
these periods we find the articles of adornment being used 
for money ; shells and beads and trinkets which were con- 
sidered valuable and which were universally known were 
among the media of exchange. There was a particular 
sort of beads made of the ends of black and white shells 
rubbed down and polished, and these were called wampum. 
This was so well established as currency among the In- 
dians that the court of Massachusetts ordered in 1649 
that it would be received in payments of debts among the 
settlers to the amount of forty shillings. Kich Indian 
chiefs hoarded the wampum even as miners hoard gold 
and silver. 

In the agricultural stage we find a great change; corn 
became, in the European states, a measure of value, and in 
I^orway it is related that it was even deposited in banks 
and loaned and borrowed. It is a great advantage over 
articles, in that it is easily divisible even to a grain. It is 



328 



ECONOMICS. 



known that grains in Central America were formerly 
circulated as money. So, too, in America, in the colonies, 
tobacco, beans, tar, wheat and other articles were not 
only used in circulation but made legal tender by law 
for the payment of all debts and obligations. In 1618 
the Governor of Virginia ordered that tobacco be received 
at the rate of three shillings for a pound-weight, and the 
penalty for refusing so to receive it was three years' hard 
labor; thus it was made legal tender. And we are told 
that when the Virginia Company imported young women 
as wives for the settlers the price per head was 100 pounds 
of tobacco, which was subsequently raised to 150 pounds 
on account of the scarcity or superior quality of the goods. 

As late as 1Y32 the Legislature of Maryland made to- 
bacco and Indian corn legal tenders. And so we find that 
land was bought with tobacco; groceries and provisions 
were bought for tobacco; subscriptions to colleges were 
made with tobacco ; and the foundations of lotteries made 
on the basis of tobacco. So South Carolina, in 1687, made 
corn, peas, pork, beef, tobacco, and tar, legal tender. In an 
early day in Oregon, wheat was made a legal tender for 
the payment of taxes and debts. Cows were made legal 
tender for taxes in Massachusetts colony, and the poorest 
cow was always given for taxes. 

The use of metals, particularly gold and silver, repre- 
sented a great step in the advance of commerce. We find, 
too, that the lower and baser metals were used first as the 
principal means of coinage, but were generally replaced 
by gold and silver as the chief measures of value. It is 
difficult to determine just when the use of gold and silver 
began; without doubt they were first used as ornaments 



ECONOMICS. 



329 



on account of their brilliancy, and perhaps their supposed 
value. They were long desirable before they were used 
as money. Indeed, in their earlier period they were doubt- 
less too scarce and too much prized to be used in common 
circulation. 

Although bronze and tin had been used to a consider- 
ble extent, copper became the first metal to be used uni- 
versally, and this was gradually replaced by silver and 
also by gold. Iron itself was used in very early days in 
the form of small spikes, which were exchanged somewhat 
similar to the bars of iron which are now used in trading 
with the Indians of Central America. And not long ago, 
iron money was in use in Japan for small values. 

Lead, too, has often been used as currency, — it is men- 
tioned by the Greek and Latin poets; and once, in 1636, 
bullets were used as an exchange in Massachusetts. Lead 
is now currency in Burmah, being passed by weight for 
small payments. 

Tin also was used at an early date. It was produced 
from Cornwall. Doubtless, the first coin of Britain was 
composed of tin. England frequently coined tin; in 1680 
tin farthings were struck by Charles II., a stud of copper 
being inserted in the middle to render counterfeiting more 
difficult. 

The earliest Hebrew coins were composed chiefly of 
copper, and the metallic money of Home consisted of 
copper, down to the year 281 ; then silver was first coined. 
The great fault in copper, its low value, now renders it 
unfit for use as a coin. It would take so much to make 
a coin of small value that its use would be cumbersome. 
However, in China and in other Oriental nations we find 



330 ECONOMICS. 

small blocks of copper now in circulation. In a country 
where there is such infinitesimal division in exchange, 
doubtless it might be used to-day. For subsidiary coinage, 
bronze has succeeded copper with nations of the world. 

Since the first introduction of the art of coinage, silver 
has been coined and highly prized for its fine, pure white 
luster, its peculiar qualities making it desirable for money ; 
and the valuation put upon it for use in the arts has ren- 
dered silver one of the most suitable and valuable metals 
for the measurement of values. Its value has remained 
more stable for long periods of time than any other metal. 
And one reason, as we shall learn, is the steady, even pro- 
duction of silver, and the great stock of it used in plate 
and ornaments. 

But gold has been recognized as the king of metals be- 
cause of its great desirability due to its peculiar qualities, 
of great hardness, malleability, and absolute purity. And 
these, more than anything else, have tended to render 
gold sought for by all nations of all times; and this de- 
sire, coupled with legislation, has made gold exceedingly 
valuable, so that it has always ranged more valuable than 
silver from the earliest times. Other metals have been 
used as money, such as platinum, coined in 1825 and 1845 
in Russia, and afterwards abandoned because it was unfit 
for currency, being too difficult to coin and too scarce. 
Nickel also has been used to a considerable extent. There 
is a tendency in the use of all metals to use the highest 
grades for the measure of value for large transactions, 
and to use the cheaper metals for subsidiary coin and for 
small transactions. 



ECONOMICS. 331 

Kinds of Money. 

It is convenient to divide money into various kinds 
according to its services. Mr. Ely has divided it into Pop- 
ular money, Legal money, Economic money. Popular 
money is that which is accepted by the people regardless 
of economic or legal conditions. Popular money is best 
exemplified in the definition of Mr. Walker: 

" That which freely passes from hand to hand through- 
out the community in final discharge of debts and in full 
payments of commodities ; being accepted equally without 
reference to the character or credit of the person who 
offers it, and without the intention of the person who 
receives it to consume it or enjoy it or apply it to any 
other use than in turn to tender it to others in discharge 
of debts, or in payment of commodities." 

Any article which will perform these services may be 
called money, whether it be made of paper, gold, silver, 
or lead. 

Legal money is that which is used by law, and has 
reference to legal-tender goods with reference to money. 
Anything that is established by law as money is a legal- 
tender good. Legal-tender money is not always popular; 
thus, the Treasury note or "Greenback" has been unpopu- 
lar at times. In the time of the war, in California, peo- 
ple refused to accept them, and the result was that they 
did not circulate. Frequently coins become unpopular 
and the Government is obliged to recoin them. Again, 
on the contrary, the National Bank note is not legal ten- 
der, and yet is among the most popular forms of money 
we have at present. 

Economic money fulfills the following conditions: It 
must serve as a measure of value and a medium of ex- 
ohange. In order to be a medium of exchange it must be 



332 ECONOMICS. 

popular, and to a certain extent be legal tender. It must 
be the means of making deferred payments, and also it 
must be a storage of value. In most instances money 
must be also legal tender ; but the best money will include 
all of these functions. It must be popular, being readily 
received; it should be legal tender, to answer all re- 
quirements in the law; finally, it ought to be economic 
in fulfilling the above conditions. 

Functions of Money. 
The principal functions of money are those enumerated 
above: to be a medium of exchange, measure of value, 
means of deferred payments, and storage of value. Money 
as a medium of exchange is the most popular conception. 
In this, money becomes an instrument by which exchanges 
are brought about. It comes from the expression of value 
of two articles in the market in terms of one article which 
is, in primitive society at least, the one most commonly 
recognized. Whatever money is most convenient for this, 
other things being equal, is the best money. 

Measures of Value. 
Money measures value because it has value, and only 
the substances which have value can be used as money. 
Length measures length, weight measures weight, and 
value measures value. All measures are merely compari- 
sons. Comparing one article with another, we get a meas- 
ure. When we say a table is two yards long, we express 
a comparison. The length of the table is to the length 
of a known measure, called a yard, as two is to one. When 
we say an article weighs four pounds, we say the weight 
of the article is to the weight of a known article, called a 



ECONOMICS. 



333 



pound, as four is to one. When we say the value of an 
article is four dollars, we simply imply that the value of 
the article is to the value of a known unit, called a dollar, 
as four to one. All money in exchange is a measure of 
value. It matters not what the money is, the exchange 
implies a comparison and a measure; and whether it be 
paper or gold, if it performs its money function, it is 
entitled to the term money. 

Standard of Value. 

We should distinguish the standard of value from the 
measure of value. While all money might be a measure 
of value, not all money is a standard of value. Back of 
all moneys is one to which all are referred as a standard. 
To understand this, we should observe what kind of 
standard of measurement we have in regard to length. 
There are a large number of yardsticks in every commu- 
nity. Every one is a measure of length ; but some may be 
longer or shorter than others, still they are measures of 
length. There is, however, a government standard of 
length, to which all other yardsticks are referred. This 
yardstick is the standard of length, based upon the vibra- 
tions of a pendulum. The same way with regard to a 
measure of weight. There may be several scales in the 
community, each measuring weight, although they may 
vary. There is one standard to which all may be referred 
for adjustment. This is the standard of weight of the 
government, which must be absolutely correct. So, whether 
we have bank notes, silver certificates, gold certificates, 
or silver money, they are all referred to gold as a standard 
of value. 



334 ECONOMICS. 

Deferred Payments. 
In modern life many occasions arise for contracts ex- 
tending over periods of time of greater or less duration. 
When exchanges take place on the market, usually there 
is no consideration of time; in time contracts, however, 
this is a very important consideration. It is evident 
that did money fluctuate in quantity or in value as much 
as do many commodities on the market, there would be a 
great element of risk introduced into these time contracts, 
often causing heavy financial loss to one or the other of 
the parties concerned. Great demoralization of trade 
would be tlie result. Trade would not increase as freely 
and as rapidly as it would otherwise, and possibly there 
would be even a shrinkage in times of more than usual 
fluctuation of the measuring unit. Hence it is that money^, 
which by its nature and use becomes the standard of de- 
ferred payments, must be of as stable a character as possi- 
ble. The precious metals, gold and silver, have been found 
to vary much less than probably any other known commod- 
ity, and on that account are peculiarly suited for use as 
money. Even here, however, some fluctuation occurs. To 
obviate the harm arising from these variations, different 
standards have been devised, but none of them have ever 
received more than a tentative application. 

Multiple Standard. 

One of the suggested means for avoiding any change 
in the standard of value is what is known as the Multiple 
Standard. The term refers to a standard composed of or 
based on a number <jf articles instead of one. Thus, a 
gold standard is based on simply the one article, gold. 
A bimetallic standard is a multiple standard, for with it 



ECONOMICS. 



336 



two metals are used upon which to base the money stand- 
ard. What is known as a tabular standard is simply a 
variation of the principle of the multiple standard. Ac- 
cording to the exemplification of this method as given by 
Dr. Jevons, the present monetary systems would be re- 
tained under the tabular standard, but they would cease to 
be standards for deferred payments. Instead, a number 
of staple commodities would be continually compared in 
their relations with the monetary standard, and all settle- 
ments would be made in money, but on the basis of the 
tabular standard. That is, to quote Mr. Jevons : " Sup- 
pose that a debt of $100 was incurred upon the 1st of 
July, 1875, and was to be paid back on 1st July, 1878 ; 
if . . . the value of gold had fallen in the relation 
of 106 to 100 in the intervening years, then the creditor 
would claim an increase of 6 per cent, in the nominal 
amount of the debt, and vice versa." 
Storage of Value. 
Another of the functions of money already mentioned 
is that of storage of value. The necessity for this qualifica- 
tion in good money arises from the fact that were an arti- 
cle good to-day and not good to-morrow it would be received 
in trade with considerable hesitation; no one would be 
willing to receive it unless he expected to be able to dispose 
of it before it lost its value. Such a lack of stability and 
permanence of value would be fatal to the adaptability of 
such an article as money. When a person disposes in 
trade of goods in his possession, he may not desire to in- 
vest immediately the proceeds of this trade. Hence he 
washes to receive in payment for his goods a money that 
will not shrink in value during the period that he retains 



336 



ECONOMICS. 



it uninvested. In other words, he desires to receive in 
exchange for his goods something in which the value of 
the goods he formerly owned can remain stored until he is 
ready to use it again. Convenience in storage demands 
that as little space as possible be occupied by the article 
in which the value or whatever else it may be is stored. 
Gold and silver, because of the great value possessed by 
relatively small quantities, are, as concerns the function 
of storage of value, peculiarly fitted for use as money. 

Principles of Circulation. 

The purchasing value of money depends upon the de- 
mand and supply of it, and not upon the cost of its pro- 
duction. The consideration that governs in fixing the 
price of an article in exchange is not, How much did it 
cost you? but, What is it worth to me? Of course its 
cost to the producer will influence his willingness to part 
with it, up to the point where he receives more for it 
than it cost. The demands of exchange for money will 
depend upon the amount of business being done, and hence 
the value of money will naturally be dependent upon its 
supply and the amount of business being carried on. 
Should the supply of money be insufficient to complete ex- 
changes, money will be dear; that is, it will purchase a 
large amount of commodities, or prices will be low. Should 
prices continue falling, — that is, money be continually 
growing dearer, — it is evident the debtor class will be at 
a disadvantage ; their debts, reckoned in commodities, will 
be steadily increasing and will be oppressive. On the 
other hand, an extremely cheap money, by greatly raising 
prices, will over-stimulate trade and lead to speculation. 
This is one of the almost inevitable evils of currency in- 



ECONOMICS. 337 

flation. A condition midway between these two extremes 
is the one most sought after by financiers. A money that 
just turns to the side of cheapness without being cheap, 
will give a gentle and consequently healthy stimulus to 
trade. 

A sudden increase in the value of money, such as would 
be brought about by a contraction in its volume, would 
lower prices from the mere fact that there would be less 
money with which to carry on exchanges and hence more 
goods would have to exchange for the same amount of 
money. But if we multiply money beyond the point of 
saturation, the amount needed to carry on exchanges ia 
the most perfect manner, its individual purchasing power 
will shrink, prices will rise. The method by which money 
gets into circulation is sometimes detrimental to its best 
use, from the fact that it may interfere with normal cir- 
culation. The act of its introduction has a tendency to 
disturb the equilibrium of money, but this disturbance is 
not great nor serious. Also, the irregularities of circula- 
tion demand a considerably larger amount of money than 
would be necessary were the circulation more constant. 
Large amounts of money are hoarded or laid away for 
long periods, and must be replaced by other or else trade 
will suffer from shrinkage in the money volume. 
Amount of Money Needed by a Nation. 

To determine the amount of money needed by any coun- 
try, it is necessary to consider many secondary matters. 
Of course the amount of mone}' needed will tend to in- 
crease with the population. Aside from the amount of 
the population, however, the amount of money needed 
will be less for a dense population than for the same 

—22 



338 ECONOMICS. 

population scattered widely over considerably more terri- 
tory, for in the latter case the rapidity of circulation will 
be diminished. This rapidity of circulation is a very im- 
portant factor. A country in which savings are promptly 
banked, when they pass again quickly into the circula- 
tion, or where money is otherwise kept in constant and 
rapid circulation, will need less money to carry on the 
same amount of business than one in which money is 
hoarded and circulates but sluggishly; for it is obvious 
that if money pass rapidly from hand to hand it will accom- 
plish many more transactions than if it is kept for a 
long time in one hand. Where much business is being 
transacted, more money is of course needed. This brings 
about a condition contrary to the common belief, namely: 
that if commerce be increased prices will fall, because of 
the great need of money, unless the volume should be in- 
creased to keep apace with the increase of business. The 
kind of money to fulfill these conditions is one that is 
freely convertible, full legal tender, and convenient for 
a free and rapid circulation. A money that passes freely 
in but a part of the country will disarrange the conditions 
for calculating the amount of money needed to accommo- 
date the whole country. 

Monometalism. 

Monometalism is a term applied to the use of a single 
metal as standard money. There have been instances of 
the use of different metals as the standard money under 
a monometallic standard, but gold is the metal generally 
employed for a single standard. With this system other 
metals are commonly used for token or subsidiary coins. 



ECONOMICS. 



339 



Bimetalism. 
Bimetalism, as opposed to monometalism, is the system 
under which two metals are used for the coinage of stand- 
ard money, either of them being a lawful standard money. 
Any two metals might be used for standard money under 
the term bimetalism, — a good many have been used ; but 
gold and silver are the two that commonly are used, and 
are those meant when bimetalism is referred to. With 
a bimetallic standard gold and silver are coined into 
standard money, exclusive of subsidiary coins that may 
be made from either of these or from other metals. When 
this system is employed, a legal ratio is fixed at which the 
two metals are to be coined, and this ratio should be 
permanent. 

Paper Money. 

Paper money may be of many kinds. It may be in the 
form of bank notes; of certificates representing gold or 
silver deposited to their face value; of certificates repre- 
senting certain forms of property, such as land, as in the 
case of the French assignats; of government promises to 
pay ; or it may be simply fiat money, or paper money with- 
out security of any kind, circulating merely on the gov- 
ernment enactment of legal-tender properties. The great- 
est danger connected with the issue of paper money is 
inflation, with its consequent evils. After one issue of 
paper money, others follow easily, and generally end in 
a commercial breakdown and great distress. The issue of 
fiat money has been admitted by some economists to be 
theoretically sound, but uncontrollable in practice, and 
hence dangerous. To be safe, paper money should always 
be limited in issue, and immediately convertible. This h 



340 ECONOMICS. 

generally the case with gold and silver certificates and 

bank notes. 

Paper Money and Bank Notes. 

The amount of issue of bank notes is generally regulated 

by law, and since the profit resulting from circulation 

does not fall to the government, their issue is much 

more carefully restricted than are the issues of paper 

money from which the profit accrues to the government. 

They are generally secured by deposits, property, or bonds. 

Bank notes form an elastic kind of circulation, as they 

will be issued according to the demand for money. Gold 

and silver certificates, on the other hand, are not elastic. 

Government notes and fiat money may be elastic in their 

issue, but as they may not be readily recalled they are 

unsafe. 

Monetary History of the United States. 

In the earliest history of American civilization, the 
money used was the money of old countries. At times 
this was inadequate to perform the necessary exchanges, 
and acts were passed by the different colonial legislatures 
authorizing the use of tobacco, beans, tar, wheat, and even 
wampum, as a legal tender. A little later there was a cer- 
tain amount of subsidiary coinage carried on by the colo- 
nies. But the most important currency action taken by the 
early American colonies was the issue of paper money that 
was floated by banks and by the colonial governments. 
Probably the most noted instance of the issue of paper 
money by the colonial governments was that by Rhode Isl- 
and, where issue after issue of depreciated paper money 
was poured out upon the people. It all fell rapidly in 
value, and frequently caused great hardship and distress. 



ECONOMICS. 341 

The continental currency was the next attempt of the 
American people to issue paper money. This, too, depre- 
ciated, and was practically a failure, having ultimately to 
be abandoned. 

With the organization of the United States, our mone- 
tary history was marked by fewer vagaries. By the act of 
April 2, 1792, gold and silver standard money and sub- 
sidiary coins were authorized and their coinage begun. 
Previously to this, in 1786, a law had been passed making 
the Spanish milled dollar the standard of the United 
States, but no coinage was begun. Gold had been under- 
valued by the act of 1792, consequently was exported; 
and the act of 1834, changing the ratio so as to raise the 
value of gold, was passed to remedy this. The next change 
was by the act of February 21, 1853, which reduced the 
subsidiary coinage to, the status of token money, to prevent 
exportation. Previously the subsidiary coins had been 
proportional in weight to the dollar ; thereafter they were 
made of less than their face value of metal. In 1873 
the unit of value was made the gold dollar, the coinage of 
the trade dollar was authorized, but the standard silver 
dollar was omitted. The legal-tender property of the 
trade dollar was removed in 1876, and in 1887 its coinage 
was prohibited. The coinage of the standard silver dollar 
was resumed by the act of 1878, but was on the govern- 
ment account, and not on the accoimt of individuals as 
had been provided in the early acts of 1792, 1833, and 
1837. By the Sherman act, in 1890, the purchase of 
silver for the purpose of coinage was ordered increased, 
but on November 1st, 1893, the clause authorizing the 



342 ECONOMICS. 

purchase of silver for coinage into standard silver dollars 
was repealed. 

'No paper money was issued by the United States until 
1861, at which time the "demand notes" were authorized. 
These were speedily followed by the "greenbacks," the 
issue of which eventually reached $449,338,902. 

References: Jevons, Money and the Mechanism of Exchange; 
Jevons, Investigations in Currency and Finance; Nicholson, 
Money and Monetary Reforms ; Walker, Money ; Laughlin, The Prin- 
ciples of Money; Scott, William A., Money and Banking; Bullock, 
C. J., The Monetary History of the United States ; Kinley, David, 
Money. 



ECONOMICS. 



343 



CHAPTEK V. 

CREDIT AND BANKING. 

Definition of Credit. 

Under the present organization of society it is impossi- 
ble to carry on business without credit. Credit is the 
power to command present wealth or services in exchange 
for some assurance of a future payment or return. It is 
built primarily on the confidence we have in individuals 
to pay. Not only must we have confidence in their ability 
to pay, but also in their integrity. We must also have 
confidence in the property which is used for security. 
When these two conditions are secured, then there is 
an opportunity to carry on business in a substantial way. 
It is said that over ninety per cent, of the business trans- 
actions of the world is done on credit; that is, people are 
to this extent trusted for payment. 

Instruments of Credit. 
There are certain evidences of credit in the form of — 
first, promises, such as individual notes, bank notes, de- 
posits, book accounts, stock certificates, and bonds; and 
second, certain orders, such as postoffice orders, bills of 
exchange, checks, and mobilization certificates. These mo- 
bilization certificates are simply orders for the delivery 
of certain goods, such as petroleum, pig-iron, or whisky, 
at a certain place. These certificates are bought and sold, 
and are exchangeable; their object is to facilitate ex- 
changes in the speculative market. 



344 ECONOMICS. 

Credit and Value. 

The relation of credit to value is difficult to deter- 
mine. Some hold that credit is capital, and hence, having 
value, must be wealth. So far as the individuals are 
concerned, the credit instruments which thej hold, when 
they are orders or demands uj)on j)roperty, may be con- 
sidered as individual capital, and consequently wealth ; 
but the issuing of exchange certificates to individuals 
would neither increase nor decrease the wealth of the com- 
munity, hence they could scarcely be called social cap- 
ital. In one sense, credit is a most valuable thing, but 
it is a valuable means rather than a valuable substance] 
it has no material existence in itself, and he who holds 
an instrument of credit must understand that if it is a 
resource to him, it is a liability to some one else ; if it is 
a credit to him it is a debit to some one else. Therefore 
it cannot be classified along with other capital. We must 
insist, that even though certificates may form an evidence 
of a man's resources, they do not form additions to wealth ; 
nor can you reckon in the community's wealth the titles 
to the same property. If we were taking a category of the 
Avealth of a nation, the property itself and the titles to the 
property could not be counted at the same time. 

Advantages of Credit. 

Credit has nevertheless many economic advantages. It 
is rather a means of wealth than wealth itself. It bears 
the same relation to general business that electricity and 
steam do to the industrial life. Eirst, the clumsy method 
of barter was superseded by the use of money, and when 
money became deficient or too slow for the transaction 



ECONOMICS. 



345 



of business, credit was introduced. By means of it small 
sums of money may be collected in one amount and used. 
These small sums would be useless unless somebody was 
intrusted with the management of all. It also collects 
capital and allows it to be used through more iDroductive 
hands. It likewise supplies a powerful motive for the 
accumulation of wealth. "Without credit, few of the great 
enterprises of modern times could be carried on. The rail- 
road would be built, if built at all, by the capital of one 
man instead of the combined capital of thousands. Even 
the factory and mill must be built on the credit basis, 
otherwise they would not be built. 

There are certain forms of credit which may have ex- 
change value, becoming wealth and capital at the same 
time. Take, for instance, immediately redeemable govern- 
ment paper. It is covered by only a partial reserve. This 
passes into the community as wealth and capital; how- 
ever, if the government is estimating its ow^n material 
resources it becomes a doubtful question whether it is capi- 
tal or w^ealth. It cannot estimate it any other way than a 
form of indebtedness on the part of the government. It 
can be wealth to the individual who holds it only on the 
basis of division of wealth, he holding that which is his 
share; but the wealth of the community is not increased 
unless perhaps indirectly, by displacing more valuable 
money, such as gold, and using a cheaper instrument in 
its place. The gold then can be used elsewhere and the 
paper money serves to increase credit. 

Credit Creates Capital. 
It is not an agent of production, such as land of labor, 
but rather a special mode of production, a method of 



346 ECONOMICS. 

trade, which has become so universal that it is recognized 
as an economic function, like that of labor and exchange. 
By it all forms of industry are quickened and the means 
of rapid work increased. 

Effects of Overstrained Credit. 
Overstrained credit brings commercial crises and panics. 
It promotes indebtedness on the part of the poor, and some- 
times transfers wealth from a more to a less productive 
hand. An overstrained credit may unduly stimulate de- 
mands, and thus raise prices and introduce commercial 

panics. 

Inflation of the Currency. 

Overtrading is one of the primary causes of commercial 
crises. People who buy more than they can sell, or bor- 
row money to invest in trading and business without any- 
thing but speculative hope of return, find themselves sud- 
denly short in their accounts. When a call for cash 
comes there is not enough to go around, and one trading- 
house after another must suspend payments. The result 
is, that they have traded on fictitious values with the hope 
of real profits. This condition is frequently enhanced by 
an inflation of the currency, which gives undue encourage- 
ment to business on account of the fictitious profits, which 
seem much greater than they are. It also develops a 
speculative tendency, and builds up business on a weak 
foundation. The remedy frequently applied is to throw 
out more money to satisfy the demand, but this only in- 
creases the evil. Prices continue to rise, and people, in 
a vain attempt to realize the supposed results of these 
high prices, go into excessive business and over-borrow. 



ECONOMICS. 



347 



Finally, there is a collapse in these fictitious values, and 
a failure of certain houses, which pull down others and in- 
volve very many. There is then a long period of com- 
mercial retrenchment on account of the contraction of 
business; money is scarce, and business reaches a point 

of stagnation. 

Banks as Centers of Business. 

Banks are centers of business, because they furnish the 
free capital with which to carry on old business or to 
establish new. They are sometimes called the nerve-cen- 
ters of the business system; hence they are indicators of 
prosperity or of depression, and a sound banking system 
is always essential to a healthy commercial condition. 

Banks act as depositories of funds. They have sprung 
up naturally and essentially for this purpose. Were ail 
the banks abolished to-day, some method of banking would 
be instituted before the day was over. Serving as depos- 
itories, they are the custodians of the funds used in carry- 
ing on trade. They also serve as means of making issue 
of money or bills for the purpose of exchange, although 
this may not be an essential function of banks. They 
are used almost universally for making deferred payments, 
for collecting and discounting bills. As such they have 
been regulated in different ways in different countries. 

Bis* of Banking, 
The earlier banks began with a very limited business. 
The Bank of Venice was one of the oldest organized, 
established in 1171 as a bank of deposit. It issued no 
notes, and transfers could be had only on the books of the 
bank. The Bank of Amsterdam, organized in 1G09; the 



348 



ECONOMICS. 



Bank of Hamburg, in 1619 ; the Bank of England, in 
1694; the Bank of France, in 1800, — all had rather prim- 
itive banking functions, excepting the banks of France 
and England. The Bank of Venice from its foundation 
was controlled bj the state, and was a mere method of 
security against bad paper and bad coins. The Bank of 
Amsterdam originated from the distrust of poor coins, and 
its paper guaranteeing full weight was held at a premium 
above the cheaper coins. 

What Constitutes a Sound Banking System. 

A banking system, to be sound, must have a sufficient 
banking capital, adequate to the business done. Certain 
laws should be established in regard to deposits, loans 
and circulation, invisible and tangible property, at all 
times sufficient to meet the legitimate demands. Beyond 
this, in the case of banks of issue the notes should be 
doubly secured. 

There are two great methods of banking: one is the 
state banking system, in which the government becomes 
responsible, owning and operating its banking business; 
the other is a private banking system, in which indi- 
viduals are permitted to carry on independent banking. 
Sometimes private banks have a large amount of govern- 
ment inspection and control, which makes a third class. 
A free banking system permits certain individuals to carry 
on banking under a general law established by the govern- 
ment. All that is required is to fulfill certain conditions, 
no requirements excepting for safety and general con- 
venience being established. In such cases the bank notes 



ECONOMICS. 349 

should not be legal tender, but should simply be secured by 
the resources and assets of the bank.* 

Bank of England. 

The Bank of England was chartered in 1694, and, like 
most of the early banks, had its origin in financiering. 
Certain persons agreed to loan the government £1,200,000 
for the purpose of carrying on the war with France, on 
the condition that they should be organized and chartered 
under the title of The Bank of England. One of the favor- 
ite conditions also was, that it had a monopoly of the note 
issue, — all corporations, excepting the Bank of England, 
having more than six persons, not being allowed to issue 
notes. In 1826 branches of the Bank of England were 
established at different places, and joint-stock companies 
situated more than sixty miles away from London were 
allowed to have the privilege of issuing bank notes. This 
curtailed to a certain extent the monopoly enjoyed by the 
Bank. In 1844 Mr. Peel's celebrated Bank Act sepa- 
rated the note-issue department from the banking depart- 
ment, and limited the paper currency of the country so 
as to make it rise and fall in conformity with the move- 
ment of gold coin and bullion. It was provided that the 
issue department might send out £14,000,000 of notes 
based upon government securities, and for every note 
issued above that amount its equivalent in gold coin or 
bullion must be deposited. By the process of absorbing 
the liabilities of other banks the amount of notes issued 
on government security has been increased to £16,800,000. 
Thus it appears that the only way of increasing the cir- 
culation of the Bank is to bring in gold for deposits from 

* Such notes should be allowed to circulate to such extent as the credit of the issuing 
bank makes people willing to accept them. 



360 ECONOMICS. 

the outside, which, renders it elastic up to a certain point 
only. 

The notes of the Bank of England have been legal 
tender since 1833, "so long as the Bank of England sliall 
continue to pay on demand their said notes in legal coin." 
The issue of bank notes in 1896 was for £59,YY6,325, and 
£42,968,325 of this was issued on gold coin and bullion. 

Bank of France. 

The Bank of Erance was organized in 1800, but was 
reorganized in 1848. It, with its branches, is the only bank 
of issue in Erance. Its capital when it was first founded 
was 30,000,000 francs, which has been gradually increased 
to 500,000,000. As far as its capital is concerned it is a 
private institution, belonging to the shareholders, but the 
governor and two assistant governors are appointed by the 
president of the republic, and are removable at his will. It 
may issue legal-tender notes to any amount it pleases, 
according to charter, although the amount issued is limited 
by law to 4,000 million francs. Ender this limit the 
whole amount is left to the discretion of the managers 
of the Bank. The denominations of its notes range from 
five francs to 1,000 francs. These bank notes are payable 
in coin on demand, in either gold or silver. In practice 
the government pays gold or silver, to please the person 
who presents the note; but in case of deficiency of gold 
it puts a small premium on gold, in order to keep the 
equilibrium. The coin reserve is very large, having been, 
in 1895, 3,184,000,000 francs, of which nearly half was 
silver. 



ECONOMICS. 



351 



National Banks of the United States. 

The banking svstem of the United States has had a pe- 
culiar history. The first and second national banks of the 
United States were more or less under the patronage of 
the government, though they were semi-private institu- 
tions. The government, finally failing in its banking 
project, went out of the business. During the whole period 
certain private banks were chartered from time to time. 
The banking system was built up from charters issued by 
the States, or under general laws of the various States of 
the Union. 

In 1863 the present National' Banking System was es- 
tablished. The object of its establishment was to unify 
and render secure the banking system of the United States. 
The laws for the establishment of the State banks were so 
various, and the advantages taken of these laws were so 
great, that it led to an unsafe and unsound system of 
banking. Much of the paper became depreciated and 
worthless and some of the banks failed, on account of the 
loose legislation. There was no unity, no system, no uni- 
form foundation for credit. A banking system was pro- 
posed which should remedy these evils. Another object 
was to market the United States bonds, they being used as 
security for the circulation of these banks. 

Organization. 

Any five persons in any city or town could organize 
a bank, by complying with the law. In places of less 
than 6,000 inhabitants there must be $50,000 capital; 
places having over 6,000 and less than 50,000 inhabitants 
could establish banks with $100,000 capital; while in 



352 ECONO]\rics. 

places having over 50,000 people there must be a capital 
of $200,000. One-half of the capital must be paid up be- 
fore beginning business, and the other half within five 
months. For the security of the circulation it is neces- 
sary that the bank purchase an amount of bonds, which 
are to be deposited in the Treasury of the United States. 
JSTinety per cent, of the par value of the bonds may be 
issued in uniform bank notes signed by the president and 
cashier of the bank issuing them. A fund equal to five 
per cent, of this outstanding circulation must be depos- 
ited at Washington for the redemption of these notes. It 
is not necessary that the bank issue notes at all, but it is 
required to keep on deposit with the Treasurer of the 
United States a certain amount in bonds. For banks of 
$150,000 or less capital, the minimum is one-fourth of 
their capital, and for banks of more than $150,000 it is 

$50,000. 

Regulation. 

The whole system is placed under severe rules, regula- 
tion, and government inspection. The notes are doubly 
secured by the resources of the bank, double liability of 
stockholders, and the bonds deposited with the United 
States Government. Depositors are secured on the re- 
sources of the bank, including the double liability of stock- 
holders. 

The banking and currency law of March, 1900, made a 
few very important changes. Among other things, it 
provided that the gold dollar consisting of 25.8 grains of 
gold nine-tenths fine should be the standard unit of value, 
and all other forms of money issued by the United States 
should be maintained at parity. It provided for the re- 



ECONOMICS. 



353 



demption of the coin certificates of July 14, 1890, in 
gold, and for the maintenance of a reserve fund for that 
purjDose. It further provided that silver certificates of 
over ten dollars denomination should not be issued except 
in case the Secretary of the Treasury might, if he deemed 
it necessary, issue not to exceed in the aggregate ten per 
cent, of the total volume of said certificates in the higher 
denominations. The law also permits the establishment 
of national banks of $25,000 capital in towns having not 
over 3,000 people. For the increase of bank-note circula- 
tion it was provided that notes might be issued to an 
amount equal to the par value of the United States bonds 
deposited for that purpose. Also, that when the two-per- 
cent, refunding bonds are used for the purpose of securing 
circulation, the taxes on average circulation of notes shall 
be reduced to one-half of one per cent, per annum. The 
law further provides for treasury divisions of issue and 
redemption, which keep all of the records and accounts re- 
lating to the issue and redemption of United States notes. 
The purpose is to separate the note-issue department from 
the ordinary fiscal work of the treasury. Other provisions 
of minor importance relating to the banking and monetary 
system of the United States were made. Upon the whole, 
the banking system as now established represents a safe, 
substantial and fairly elastic system. 

One of the greatest difficulties to be overcome in any 
bank-note issue is that of inelasticity. The present na- 
tional banking system of tlie United States has been defect- 
ive in this respect. Secured by United States bonds, the 

amount of the circulation expanded and contracted accord- 
-23 



364 ECONOMICS. 

ing to the amount of bonds purchased. When bonds were 
at a very high premium it proved to be a losing business 
with the banks, and they withdrew their circulation just 
at the time when it was most needed by the people. 

Canadian Banking System. 

The Canadian banking system seems to have more 
elasticity in this respect. There are central banks and 
branch banks. Sixteen banks maintain nearly 340 
branches, while of the remaining twenty-two banks, eight 
have no branches at all. ISTotes may be issued up to the 
paid-up capital of each bank, with the exception of the 
Bank of British ISTorth America and La Banque du 
Peuple, neither of which is permitted to issue circulating 
notes to an amount greater than seventy-five per cent, of its 
paid-up capital unless otherwise provided for. The notes 
are secured against the assets of the bank, including the 
double liability of stockholders. Each bank is required 
to keep on deposit an amount equal to five per cent, of 
its average circulation for the previous fiscal year. This 
deposit bears interest at the rate of three per cent, per 
annum. This makes a redemption fund which shall be 
used for the payment of the notes of any failing bank if 
such bank does not make provision for such payment within 
two months after the date of suspension. By means of 
establishing various branches the demands of the people 
are fully met, and by the method of issue such elasticity 
is secured that the amount of notes sent out varies twenty 
per cent, above normal circulation when excessive demands 
are made for currency. 



ECONOMICS. 356 

Savings Banks. 
These are among the best modern institutions for 
the encouragement of thrift and industry. The question 
of saving means simply that the individual will deny him- 
self imnecessary and trivial expenses for a larger and 
better use of the money at other times. One of the unfor- 
tunate things regarding savings banks throughout the 
Union is that they have not been properly restricted ac- 
cording to law, and have been left to private individuals 
who have not been responsible agents; hence the failure 
of their savings banks has been disastrous to many com- 
munities. The failure of the savings banks has a more 
demoralizing influence on humanity than the failure of any 
other. If private parties are to be allowed to carry on 
savings banks they should be under the most strict govern- 
mental regulations, and actual security of the deposits 
guaranteed by the state. 

Postal Savings Banks. 
Several countries have facilitated the method of saving 
by establishing postal savings banks; that is, the estab- 
lishment of savings banks in connection with the post- 
office. A card having room for a certain number of 
postage stamps is issued for the smaller deposits. When 
a postage stamp is bought it is placed upon the card ; when 
the card is full it is returned, and credit given for the 
amount on the card. Larger amounts are deposited di- 
rectly, and credit given on the whole amount. Interest 
is paid on all of these deposits. The deposit allowed by 
one individual is limited. The whole system is one of 
economy, from which the banking principles reach the 



356 



ECONOMICS. 



people in the most convenient way. Every state would 
find this a convenient and economic method for encourag- 
ing savings and developing the banking system. 

References: Dunbar, History and Theory of Banking; Bolles, 
Practical Banking; Gilbert, History and Theory of Banking; Co- 
nant, History of the Banks of Issue ; Breckenridge, The Canadian 
Banking System; Taussig, The Silver Situation in the United 
States ; Cleveland, F. A., The Bank and the Treasury ; Cannon, J. G., 
Clearing Houses; Mitchell, A History of the Greenback. 



ECONOMICS. 367 



CHAPTEE VI. 

PROCESSES OF EXCHANGE. 

Organization oi Exchange. 

Exchange is one of the most important branches of 
Political Economy, as it permits the utilization of all 
surplus products of individuals or nations. People are 
thus enabled to carry on certain lines of industry, and 
exchange their surplus products for the surplus products 
of other industries. This brine's the utilitv of the whole 
world into service, and saves time and energy. 

In primitive society exchange was very light. It con- 
sisted in moving those articles possessed of relatively great 
value in small compass or bulk, and was not carried 
on systematically. By-and-by we find the development of 
a systematic trade through peddlers who carried their wares 
about with them, or by caravans exchanging the surplus 
products of different countries. Then in the early periods 
of civilization, down to the Middle Ages, a large propor- 
tion of the goods manufactured was consumed at or near 
the place of manufacture. The trading by ships on the 
sea brought various luxuries to the ports for exchange; 
but after canal, railroad, river, lake and ocean trafiic be- 
come developed, all material, light or heavy, is easily ex- 
changed. 

So complete is this exchange of surplus products that 
even vegetables are transported around the world. One 
can enter any town in the interior and find there the 



358 ECONOMICS. 

fresh fruits of nearly every country. To-day we find ex- 
changes being organized throughout the world: certain 
persons handle certain kinds of goods, — others, other 
kinds ; certain persons agree to carry goods from place to 
place; certain organizations are ready to furnish certain 
goods at any time to any reasonable amount. 

Importance of Exchange. 

All legitimate exchange is an increase of utility, for it 
enables persons to exchange the surplus of one article for 
another of which there is a deficiency. A large surplus 
of corn in Kansas would remain useless, to decay or to 
be used for fuel, unless it could be exchanged for ma- 
chinery or furniture or dry goods or the vegetable products 
of other countries. Exchange enables Kansas to produce 
corn, wheat, and cattle, — those products for which it is 
particularly adapted.- Certain territories that can produce 
articles at a greater advantage than others can exchange 
these articles for the others which are necessary or con- 
venient, created in other districts, at great advantage. 
This increases the productivity of labor and of capital, 
for it enables various persons to be encouraged in pursuits 
for which they are particularly adapted, and they must 
thus pursue those indutries which are best suited to their 
capacity and condition. It is evident that in all legiti- 
mate trade or exchange, all parties engaged are profited 
thereby. The theory that if two persons trade one must 
gain and the other lose, is entirely improper. The fact 
is that people who trade should each gain thereby. That 
is the real fundamental principle in all exchange. The 
poorest workman in a small town has the advantages of 



ECONOMICS. 



359 



exchange. While he works by the day in building stone 
walls, he sits down at a meal where the table is supplied 
from the products of the world, and he enjoys his clothing 
from various countries. 

Keans of Exchange. 

There is developed a large class of traders whose entire 
business is to make exchanges between different communi- 
ties, countries and individuals. Those people are indis- 
pensable to modern industrial life. Various attempts have 
been made to get rid of "middlemen," who bring the pro- 
ducer and consumer together for the purpose of exchange. 
This attempt has failed. To a certain extent this class 
has become too large in many instances. In our small 
towns as well as in our large cities there are too many 
tradesmen and too many agents who carry on legitimate 
business. From time to time this readjusts itself, and the 
tradesmen turn to productive enterprises. 

To-day we find the postoffice, the express companies, ' 
freight companies, railroad and transportation companies 
always ready to transport goods with facility and dispatch 
to any part of the world. In the aid of these the telegraph, 
the telephone and the postal service render communi- 
cation almost perfect. In connection with this we find 
the use of many great facilities for trade, but more ex- 
pressly the credit system, which is an instantaneous pro- 
cess for meeting tlie demands of exchange. The banking 
and credit systems of the world complete this great 
mechanism of exchange. The clearing-houses of countries 
and of the world render the system of debt-payment almost 
perfect. Back of all this economic mechanism is the legis- 



360 



ECONOMICS. 



lation of states and nations concerning the administration 
of commerce. This involves a system of rules and regula- 
tions and laws for the proper conduct of all such payments 
and of all forms of commerce and trade. 

The Harket. 

The market is a place where buyers and sellers come 
together for the purpose of exchanging wares. This may 
be either local or general ; it may be either a retail market 
or a wholesale. The fundamental principles are the same 
in either case. For example, there may be such a thing 
as a horse market. This may be local, where a certain num- 
ber of horses are offered for trade and a certain number of 
buyers come together to make the exchange. The idea of 
a horse market may be so enlarged as to include the market 
of a whole country, or of the world, in which the horse 
market is daily weak or strong and horses may or may not 
be in good demand. The retail market is a place where 
goods are sold in small quantities. The rates are different 
in each case, and market quotations have become general- 
ized. In either case there is no market, so called, until 
the regular price has been established according to the 
law of supply and demand, — the amount offered on one 
side and the amount demanded on the other. By the use 
of a well-established market people understand whether 
they are paying too much or too little for any line of 

goods. 

Domestic Exchange. 

Domestic Exchange is a term used to designate local 
exchange when applied to a nation or community. It is 
an exchange of manufactured goods or farm products, or 



ECONOMICS. 361 

raw materials or finished products. Indeed, all of the 
various products of a country can exchange for home con- 
sumption. This is called the Domestic Market. In a 
domestic market an article usually has the same price 
over the entire country plus or minus the cost of trans- 
portation. Yet there are great centers like ITew York 
and Chicago which have a tendency to fix the price of 
domestic products. However, every small town has its own 
local market, and prices will vary slightly according to 

conditions. 

Foreign Exchange. 

Foreign Exchange is the trade of one nation with an- 
other. In this respect the nation does not trade as an 
individual with another one, but settles its balances. In- 
dividuals of one country trade with individuals of another, 
but in the settlement of balances a system of barter is 
introduced as between one nation and another. The settle- 
ment of balances between one country and another is 
carried on by the purchase and sale of exchange, so that 
the debts of one country offset the debts of another and 
the balances are paid. Individuals of each nation will 
trade with one another when it is an advantage for them 
to trade, and when that advantage ceases trade will cease. 
Long-continued trade is kept up only on the basis of 
mutual advantage. 

International Values. 

Owing to the fact that one country may produce an 
article much cheaper than another, prices in one will vary 
from those of another, and there will be established cer- 
tain international values when there are no restrictions. 



362 ECONOMICS. 

However, international trade is not widely different from 
domestic trade, except in the method of settling balances, 
and even that difference is not marked. The mode of 
foreign exchange varies little from that of domestic ex- 
change. The buying and selling between foreign countries 
is conducted very much the same as buying and selling 
between different parts of one great country. If a man 
in California buys a bill of goods in New York, he buys 
exchange on l^ew York for the payment of those goods, 
and the State of California has not transacted any business 
with the State of ISTew York. The same is true with the 
man in ]^ew York who buys a bill of goods in London: 
he pays for them by purchasing exchange on London. The 
American government and Great Britain are not parties 
to the transaction, except so far as they regulate it by laws 
of exchange. Hence it must follow that international 
values are not widely different from national values. It 
appears that very many false notions have risen in the 
minds of students on account of the carelessness of writers 
on this point. The trade of Great Britain with the United 
States is not a national process, but an individual affair. 
The effects on the nations may vary on account of the ship- 
ment of gold from one to the other, but the same might 
occur betwen ISTew York and San Francisco. If a shortage 
of gold occurs in a nation it may affect government finan- 
ciering, while the difference in the amount of gold on hand 
between ISTew York and Chicago would have nothing to do 
with our national financiering. The difference between 
our exportation of gold between l^ew York and London 
might have considerable effect on our national financier- 
ing; otherwise the principle remains the same. 



ECONOMICS. 363 

There are, however, such things as international values, 
dependent to a large extent on the immobility of labor, 
capital, and the various conditions of business. Because 
transportation and communication are so much facili- 
tated, there is a tendency for wages and interest to be 
equalized all over the globe, and also for the same grade 
of goods to have the same price everywhere, plus or minus 
the transportation. Hence tradesmen make more out of 
the element of time than anything else, which of course 
from an economic standpoint tends to reduce profits more 
to the average of interest on capital, plus the service of 
management. 

There are what are known as natural advantages for the 
j)roduction of certain lines of goods, and to these may be 
added artificial advantages, including long experience 
in a business and the development of skilled labor, which 
make a difference in values of articles and stimulate inter- 
national commerce. International trade thus enables a 
community to furnish goods which cannot be produced at 
home on account of the want of certain necessary requisites, 
and also, through the process of cooperation, which 
enables a country to dispose of those surplus goods w'hich 
it can produce most advantageously in exchange for 
those which cannot be produced as cheaply as in other 
countries. But it does not follow that because articles 
can be produced cheaper in another country, a given 
country should fail to manufacture them; for it is evi- 
dent that if the prices of any given four articles (A, B, 
C, and D) are less in Germany than the prices of the same 
four articles in the United States, and that prices of any 
other four articles (F, G, H, and I) are greater in Ger- 



364 



ECONOMICS. 



many tlian the same four articles in the United States, 
Germany would not manufacture all of the goods con- 
sumed of the first four articles and the United States 
all of the second four, although there is a tendency that 
way. The exportation of the first four articles from Ger- 
many to the United States and the second four from the 
United States to Germany would tend to influence trade. 
The demand having been satisfied on most articles, trade 
would fall off, while on others it would continue till the bal- 
ance of trade must be paid in cash. When the balance of 
trade is paid in cash, this importation of gold into the coun- 
try makes prices high, checks exports into the country re- 
ceiving the gold balance, and increases the exports in the 
country sending it. The first effect is a reduction of trade 
in those articles in which there is a small difference between 
domestic and foreign prices, while the reduction fails to 
affect the trade between those articles in which there is 
a large difference. Therefore, in the course of trade it is 
easily seen that those commodities whose cost of produc- 
tion is very nearly the same in the two countries trading- 
will soon cease to be exported, while those in which there is 
the greatest difference will continue to be exchanged, l^ow 
this difference of cost of production is largely owing to a 
difference in advantages. It is evident that a country 
will create and export those goods which it can most ad- 
vantageously produce, or those in which there is for the 
time the largest difference in price in the two countries. 
Yet, in considering this, the real basis of operation is 
found, not in a comparison of the difference of cost of 
producing the article in the two countries respectively, but 
in the relative cost of producing within a given country a 



ECONOMICS. 365 

certain amount of the articles for which there is a steady 
demand. In this argument it is understood that the price 
of production in a given quantity is estimated, as hitherto 
stated, by the subjective value; that is, the demand or 
marginal utility. But it is not intended to go into a dis- 
cussion of the theory of value, as it is presented fully in 
another place. 

A country may be able to create all of the articles 
which it imports from another country more cheaply than 
those same goods can be created in the country from which 
they are imported, but it will not do so, because it can 
devote itself more advantageously to the producing of 
a few of those articles in which the price is very different 
between the two countries, and exchange those for the 
goods wdiich can be produced most advantageously in the 
country from which the goods are imported. With our 
present facilities, and without a protective tariff, we could 
produce all of our cotton and woolen goods in this country^ 
and many of them as cheaply as the imported goods plus 
the transportation. But we can devote our energies to 
industries which yield us a larger ,return, and import 
many of those articles in which there is a small differenc<3 
or no difference between the cost of production here and 
in the country from which they are imported. It is not 
here intended to discuss the principle of the development 
of a variety of resources of a nation and the employment 
of the capital of a community in different ways for the 
sake of the development of the resources of the nation and 
the building of national credit and independence through 
diversified industries. Nor is it intended to show the ad- 
vantages of free trade by allowing a nation to do those 



366 ECONOMICS. 

things which it can do most advantageously. A carefully 
administered tariff will observe this very thing, and will 
levy taxes upon those goods which may be most advan- 
tageously manufactured in other countries. Many persons 
have drawn an important conclusion here in respect to 
the evil effects of the tariff in turning a nation from a 
natural channel of manufacture and trade. The evil lies 
in the method of managing the tariff, rather than in the 
tariff as an institution. (See Book IV, ch. IV.) 

Balance-of-Trade Theory. 

There is a theory that in trading, the nation which re- 
ceives the largest payment of cash balance is really the 
gainer in trade. This may not necessarily follow. It will 
depend largely upon the condition in which the articles 
are manufactured and sold. A nation may be importing 
goods from another country in such an advantageous man- 
ner to herself that those goods are worth more than cash 
sent out, plus the cost of transportation; and indeed it is 
a supposition of trade that if a man spends a dollar for a 
hat, the hat is of more advantage to him than the dollar, 
and what we call wealth and the well-being of a nation 
is the goods that that nation may import which are of 
greater service than the money sent out. But owing to 
the fact that the goods are yet to be marketed, and that 
money or cash is always marketed, and because it takes 
a sufficient amount of free capital to run a business of 
the nation, a large and sudden exportation of gold in the 
payment of the balance of trade will create alarm in the 
minds of financiers, who see that the means of carrying 
on trade prosperously are being shortened. In reality, 



ECONOMICS. 



367 



however, a greater value lias been left in the country in the 
goods vet to be marketed. 

Also, the old feeling that if two nations trade, one 
\rill lose and the other gain, led us to false notions of the 
importance attached to foreign trade. The fact is, that 
nations will not trade with each other unless it is an ad- 
vantage to both; and they may trade and both make bv 
the transaction, or they may both lose temporarily, — though 
one cannot make and the other lose perpetually. We 
should be careful not to measure the advantages of inter- 
national trade by the balance of the imports over the ex- 
ports or the excess of the exports over the imports, for the 
real advantages lie back of these things which are seen. 
In the long run, owing to the balance of accounts for cash, 
the trade of different countries balances. The old econo- 
mist's idea was, that the excess of exports over imports 
represents the gain of the nation in trade. The free- 
trader says that the excess of imports over exports repre- 
sents the nation's prosperity. These statements are in part 
true, for balances represent only the margins of trading in 
the different countries. The real advantage, as I have 
stated above, is in the fact that parties gain in the transac- 
tion by having an increased amount of wealth for con- 
sumption and utility. As Cairnes says, " It would be just 
as reasonable to represent the advantages of learning as 
measured by the salaries of the teachers, as to represent 
the advantages of trade between two countries by the 
margins of profits of those engaged in trade." 

In estimating the true balance of trade, there are sev- 
eral things to be considered. It must not be limited to 
the excess of goods exchanged for goods. The whole ae- 



obS ECONOMICS. 

count of debit and credit must be shown. There is tbe 
cost of transportation. The freight charges are always 
a burden of trade, and go ultimately to the country that 
furnishes the transportation. This freight on goods will 
vary on different articles, being much larger in proportion 
on heavy goods and raw materials than on light goods and 
highly finished products. Therefore, in estimating the 
value of goods of one kind or raw material exchanged 
for goods of another kind, a highly finished article, freight 
is a great item in showing a balance. Again, there are 
several accounts which are settled by international balance, 
such as interest on capital invested, the expense of for- 
eigners living in the two countries, bankers' commis- 
sions, and various other items. These must of neces- 
sity be taken into account before a true estimate of the 
balance of trade is made. 

It is easily seen that our domestic trade is after all 
of greater importance than the foreign trade, as far as 
national prosperity is concerned. Hence it is that while 
the latter should be encouraged, nothing should be done 
to impair the former. 

References : Goschen, Foreign Exchanges ; Mill, International 
Values ; Bullock, Introduction to Economics. 



ECONOMICS. 3G9 



CHAPTER VII. 

COMMERCIAL CRISES AND PANICS. 

Definitions. 

Commercial crises, trade depressions, and panics are 
terms used to express short phases of one great movement ; 
and indeed are frequently used as symptoms of one move- 
ment, without discrimination. A crisis or panic is a stop- 
page of the movement of trade, during which every one 
wants to sell, nobody wants to buy. Broadly stated, a 
panic is due to overtrade, and its greatest condition is 
the absence of credit. A panic is a widespread loss of 
credit, but sometimes the term commercial crisis is used 
to cover the whole period of depression of business. It 
would be better, scientifically, to hold that the term crisis 
is simply a point in the movement at which a general 
breakdown in business occurs ; the panic, that which im- 
mediately follows a breakdown; and the trade depression, 
that which occurs before the crisis, as a cause, or, after 
the panic, as a result. At any rate, experience teaches 
us what the thing itself is, although it is difficult to reason 
about it unless we come to some agreement upon the terms 
in use. Although it is easy to understand what a panic 
is, to philosophize about it, to define it, and to trace 
out its causes and effects, are certainly very difficult pro- 
cesses. 

A commercial crisis is a sudden disturbance in the 
—24 



370 



ECONOMICS. 



money market, and arises chiefly from loss of confidence 
in the ability of debtors to pay. It turns upon the 
pivot of credit, and is immediately dependent upon the 
amount of available cash for the payment of obligations. 
The trade depression indicates that the manufacturers 
and the producers have no confidence in the ability of 
the community to absorb the manufactured or funded 
products or raw materials. 

Trade depression always comes from a failure of 
production to adjust itself to the conditions of consump- 
tion. It is sometimes attributed to overtrading or over- 
production. Overproduction is a very indefinite term as 
it is used to express the satisfaction of general wants. 
So far as that is concerned, there is no such thing 
as overproduction, for the general wants of a com- 
munity are never supplied; the desires always exceed the 
means of satisfaction. It may be used also from the stand- 
point of the producer, who finds a certain stoppage 
in the market and more goods on hand than he can dispose 
of. He attributes it to overproduction. It may be used 
on the basis of particular wants of the consumer, in 
which he finds one want relatively satisfied while others 
go unsatisfied. The real fact of the case is, that under- 
production or underconsumption could be used just as 
well as overproduction. In the case of underproduction, 
certain investments of capital and labor fail to yield a 
return; there being no income from this source, there 
will be underconsumption on certain lines of goods. If 
producers have thrown this class of goods upon the market, 
there will be a glut in the market and an overstocking of 
the market, which is usually termed overproduction. It 



ECONOMICS. 



371 



may be tliat excessive stimulation of certain industries 
will throw a large amount of goods on the market, which 
will make an apparent overproduction, although the real 
situation in the case is a lack of normal consumption. 
This causes a disturbance in trade and a general depres- 
sion of business. It is rather an uneconomical or abnor- 
mal distribution of products, labor, capital, or services, 
in production and distribution. 




7 6 6 
Diagram I. 



2 ^ 4 



We know that a panic is a reaction after an excessive 
hope, — after speculative enterprise ; we know that a panic 
is the result of overtrading. There is first a speculative 
expansion of certain industries, not necessarily all indus- 
tries, but is an overproduction of those industries, which 
results in the fall of prices below cost. Then merchants 
who are handling the goods are unable to pay the producers 
for the stock already in hand, and cease to order new 



^72 ECONOMICS. 

goods; the producers in turn are unable to pay the ad- 
vances made hj the banks, and a failure of banks and 
business houses follows ; then a general alarm ; and 
finally, a panic. 

Course of Trade in Depressions. 

This movement is graphically represented by this dia- 
gram. Suppose all of the commodities in the market mak- 
ing up creative industry are divided into ten groups in 
proportion to their desirability; that the greatest demand 
is for group (10) and the least for group (1). (See Dia- 
gram I. ) ISTow suppose there comes any sudden restriction 
in demand, it will fall first on the lower groups, (1-A), 
(2-B), and (3-C), and we shall find that the merchants 
are falling oif in their demand for these commodities be- 
cause they have less faith that the people will absorb these 
products of industry. There is necessarily a restriction 
in production; profits are lower; some mills are shut 
down, wages are cut down, and there is a lack of the 
power to exchange the goods manufactured here for goods 
manufactured in other departments. ThiTS people will 
cease to demand, first, those that are less desirable; 
namely, groups (4-D), (5-E), and (G-F), and thus man- 
agers of this group will find less demand for their prod- 
ucts. This shortened demand will again cause alarm 
to merchants, and they will buy less of the products of 
groups (4-D), (5-E), and (6-E), and these in turn must 
follow the example of the first three groups; namely, 
shorten time, reduce wages, and restrict consumption, 
and in turn affect the groups above them, (7-G), (8-H), 
and (9-1), just as they were influenced by those below 



ECONOMICS. 



373 



them. Whatever the cause of any sudden depression, or 
restriction of any branch of industry, it works this wav 
on other branches, tending to depress them and draw them 
into the general movement of depression and panic. It is 
easy to see that when this decline extends throughout the 
entire community, when there is a fear of manufacturers 
that the public mil not absorb what they are producing, 
and a fear of the traders that their customers will not ab- 
sorb what they buy, affairs have reached a critical point. 
When business resumes, it is always with the reverse of this 
process, whether slow or rapid in movement: first one 
industry, then another starts up, giving confidence to 
others, and gradually there is a return to the legitimate 
conditions of business. The lines xy, no, zw and ph re- 
spectively represent the progress of the depression. 

Trade Cycle. 
We have observed how the whole business world is con- 
nected, and every part dependent upon every other part, 
so that the whole productive, distributive and consumptive 
enterprises are closely connected. We have also said some- 
thing about the great extension of credit, by which business 
is carried on with a very small amount of real capital in 
sight. Credit to a large extent is a psychological condition 
of trade, and results of overstrained credit give rise to 
psychological phenomena. When business is good and 
everything moving in proper equilibrium, credit begins 
to expand. The result of expanding credit is a larger 
use of credit, the encouragement of more business enter- 
prises, a great activity in trade, and gradually rising 
prices. These high prices in turn promote stimulative 



374 ECONOMICS. 

enterprises, and tliese stimulative enterprises tend to extend 
credit still further, until finally, a slight alarm, a failure 
and a refusal to buy, or some other cause, precipitates 
a sudden panic, — the bubble of trade is burst. First 
comes speculative expansion of certain industries ; second, 
the excessive expansion of credit; and third, sudden 
change in the demand for certain goods, which leads to 
undue production in one line or stops production in an- 
other line. This leads to trade depression and crisis, 
which may precipitate a monetary panic. (See Diagram 

n.) 

An inflation of the currency may to a great extent, by 
inducing these relations which I have noted, lead on to 
the conditions of a panic, and the panic be precipitated 
by some sudden cause. Also, a sudden contraction of the 
currency, which causes a scarcity in the money market, 
may cause certain industries to be cramped in their opera- 
tions, and lead on to failure and a panicky condition of the 
market. It will be observed from this, that the banking 
system is closely related to every crisis or panic that has 
ever occurred; because the banks in modern times repre- 
sent the nerve-centers of business, and through them are 
indicated the kind, nature and amount of business being 
done in the country. Without credit, banking itself cannot 
exist. If banks would take in only so much money and 
keep a reserve for every dollar taken in, there would he 
no banking. Consequently, they represent the centers of 
credit, and are exceedingly sensitive to any movement 
in trade or business. Though banks cannot be called 
the causes of panics and crises, it may be said that illegit- 
imate banking and an improper extension of bank money 



ECONOMICS. 



376 



have not only brought about monetary panics, but have 
intensified panics brought on by other causes. 



c^cvjlotiojr^AT^ 




The trade cycle. 




1573 4 5 6 7 8 9 80 I 2145676 990 I 23456789l9boi"e 



/ 



Y 



Line of business prosperity ^ 187S-1900. 
Diagram II. 



376 



ECONOMICS. 



Mr. Jevoiis lias endeavored to show that industrial 
crises, which often bring about panics in the money mar- 
ket, occur in regular periods of about ten and one-half 
years. And he has tried to show that these are caused by 
the effects of the spots on the sun, as they reappear in a 
cycle of about the same length. The theory is, that varia- 
tions in the sun's heat and light cause fluctuations in 
harvest, which affect the whole industrial world. Mr. 
Jevons is not conclusive in his own mind as to the tena- 
bility of his position, but still makes a strong showing that 
this possibility may be the real cause of the various con- 
ditions of the market. 

Movement of Prices. 

The movement of trade may be recounted chiefly in 
two ways: one by studying the movement of prices, and 
the other by observing the banking processes of a nation 
or of the Avorld. Either one is sufficient to give an index 
of the movement of the volume of business. The move- 
ment of prices in itself will show, if we except abnormal 
interferences, approximately the exact condition which 
the whole trade of the world is in. Mr. Jevons has 
made a careful investigation of this subject on the basis 
of the composite standard of value, and the method of 
index numbers. He takes the number of articles during 
the years 1845 to 1850, and, averaging the prices of each, 
marks each at 100, to begin the year 1850. 'No matter 
what its unit is, whether it is a yard or a pound or a 
bushel, or a ton, he marks it 100. jSTow, as prices rise 
above or below this, a certain per cent, is added to or taken 
from 100. Then the percentage can be averaged, and 



ECONOMICS. 377 

the general movement of prices indicated. (See Diagram 
III.) This method of indexing prices is a means of 
determining the rise or fall in money ; thus, where the 
standard of measurement is gold, the comparison of prices 
of forty or one hundred articles through a ^^eriod of years 
will show the rise or fall in the purchasing power of gold. 
The same may be true of silver. We shall often find 
arguments set forth by which people try to measure gold 
with silver, saying that silver falls, but gold does not fall 
in price; while the people on the other side say that gold 
rises, that silver does not fall; — when the only true Avaj 
of comparison is to measure the silver prices of these 100 
articles and likewise the gold prices in turn. By that 
means you will get the just relation between gold and 
silver; and it is upon this basis that we show that gold 
has been increasing in value during the years 1873-96. 
We shall see by this chart that there has been a tremendous 
fall in prices since the year 1873. We have come down 
from the position Ave were in in that period, step by step ; 
and this does not mean a coming down from paper-money 
prices to gold .prices. The gold prices of all articles 
the world over have fallen. I say all articles, — the aver- 
age of all articles has fallen, because, owing to certain 
excessive demands for an article over and above the sup- 
ply, it may rise to a very high price while other articles 
remain low. But when we come to average them all, 
we have a rude approximation, at least, of the rise and fall 
of prices. Men who were in business in the twenty- 
three years from 1873 to 1896 know how difficult it was 
to fight against this continual falling in prices. They 
took on a lot of goods wlien prices were down, and they 



378 



ECONOMICS. 



looked forward to the time when prices would rise, or 
when there should be a movement or brisk trade in which 
they should realize good profits. But they were soon 
aware of another downfall in prices, and though thej 
bought at a low figure, they found they must sell at a 
lower figure. Men bought land and property upon this 
basis, and lost all through a gradual lowering of prices. 
We may observe by Diagram III that there are two kinds 
of commercial movements in the world : the rotary move- 
ment, running through a cycle of years, approximately ten, 
and the linear movement, in which there is a gradual rise 
or a decline in prices or in business. The shorter move- 
ment is called the trade cycle, and is well illustrated by 
Diagram II. 

Warnings of an Approaching Panic. 

We have first a symptom of an approaching panic 
through the wonderful prosperity indicated by numerous 
schemes and enterprises of all sorts; a general rise of 
commodities, of lands, of houses, of property of all kinds ; 
steady demand for workmen; the rise in salaries and 
wages ; a general desire for speculation in order to become 
rich suddenly; a public that seems blind and easily de- 
ceived; great luxury, leading to excessive expenditures; 
a hopefulness that large returns will be made in all en- 
terprises. The banks, too, show a very large amount of 
discounts and loans, and ordinarily a large issue of bank 
notes, although in recent times in America the excessive 
value of government bonds has caused the retirement of 
circulation; and also there is a very small reserve in 
specie, and deposits begin to grow small in comparison 
with the discounts. Then, suddenly some cause brings 



1790 1800 

220 




1790 1800 1810 1820 1830 



1895 1900 



Opposite pnge 378. 



ECONOMICS. 379 

on a crisis : it may be a new tariff law ; it may be change, 
or threat of change, in the monetary system; it may be 
a hint that somebody is failing; it may be a collapse of 
some speculative scheme on the other side of the globe of 
far-reaching consequences, which suddenly causes the 
wheels of business to stand still. There is a short period 
of what we call the genuine panic: it is a scramble for 
funds; a struggle to make both ends of business meet; 
a lack of confidence; a flurry in business, — and then 
comes the dull period of stagTiation, when there is a lull 
in the storm, and there is virtually no business — as if each 
man paused to take a reckoning, to find his bearings. 
Then follows a rapid and active liquidation and a steady 
recovery, or a slow and painful liquidation and a recovery 
still slower. Finally, the last part of the depression is 
reached: loans and discounts are few; money reserve ac- 
cumulates; circulation is restricted; interest is low, thou- 
sands of workmen are forced out of employment ; a cut in 
wages; a cut in salaries; prices of commodities fall very 
low ; no confidence whatever exists ; merchants order from 
day to day, from hand to mouth as it were ; factories run 
on part time, or stop entirely; no one dares to make any 
new ventures in business, and all old business is run at the 
minimum rate. We observe also that these conditions are 
readily indicated by the balance-sheets of banks. As a rule, 
we may say when prices are high and discounts and loans 
large in proportion to deposits, having steadily increased 
for years, danger is not far away. And again, when dis- 
counts and loans are not only large in proportion to de- 
posits, but have increased steadily' for years, and there 
comes a sudden f alling-off for a time, but to increase again 



380 ECONOMICS. 

suddenly, danger is apparent. This is tlie record of the 
banking balance-slieets of the world in their relations to 
panics and crises. 

Precipitation of a Panic. 

But when we reach a point where there is widespread 
idleness in the country; when discounts and loans have 
been very mucli reduced; when bank reserves have been 
greatly increased; when salaries have been decreased, and 
interest rates are low ; when everybody is cautious, stimu- 
lation itself dead; when expenditures are cut down to the 
lowest possible notch, — we are not far away from an im- 
provement in business. It may come suddenly, or it may 
be a long, slow process. This period is called that of 
liquidation and recovery. During this period old debts 
are settled; exchanges are made; either voluntary or 
forced liquidation takes place ; loans are slowly extended, 
and old business resumes. We reach then the stage of 
what we may call confidence, and this growing confidence 
encourages new business ; and then we enter a long period 
of what may be termed prosperity, lasting usually from 
four to seven years. Wages and interest rise, and then 
we pass to the period of extreme overtrading and specu- 
lation, and discounts are large and prices high, and an 
over-extension of credit bringing us to the eve of another 
panic. The trade cycle is completed. This illustration 
is somewhat conventional, yet in its chief cliaracteristio 
it is the true trade movement that has been going on for 
the last hundred years, and even longer. We may notic3 
a graphic conventionalized movement of trade in the 
United States from 1873 to 1893. We may see there. 



EC03V0MICS. 381 

beginning April 1st, 1873, a sudden panic; a short period 
of stagnation ; a long, slow period of recovery and liquida- 
tion; a rising and falling prosperity, to May, 1884; an- 
other panic, not so severe ; then stagnation again, a grad- 
ually rising prosperity to October, 1890; another sudden 
precipitation, then stagnation, and finally a sudden start 
ujjward to June, 1893 ; and then a remarkable move- 
ment of prices downward, followed by rise of prices from 

1896 to 1900. 

Causes of Low Prices. 

But' we have said that prices not only represent the 
tendency of the business world, but have been in them- 
selves the causes of crises and panics. But what are the 
causes of low prices ? First, since 1873 at least, the causes 
of low prices have been twofold, namely : the increased fa- 
cilities for production of certain kinds of goods, and the so- 
called overproduction of these far beyond what the market 
would absorb; second, the constant and steady rise in the 
price of gold, — that which measures the value of all 
articles. ISTumerous economic writers have tried to show 
that the whole difficulty rests upon the fact of improved 
machinery and new inventions and discoveries, which 
facilitate the rapid production of certain articles, and the 
consequent fall of their valiTC. To a large extent this 
has been true, for indeed we witness in the production of 
iron in all forms, in the production of copper, in the pro- 
duction of aluminum, a rapid and sudden fall of prices 
which can be accounted for in no other way than that of 
improved processes. But when we come to take an average 
of all prices of all goods, then we see an average fall, and 
we come to the conclusion that there must be some other 



382 ECONOMICS. 

influence at work, whicli could be only the sudden rise in 
the value of gold. For, indeed, were things properly ad- 
justed, were everybody's needs supplied, everybody's de- 
sire fulfilled, there would be no such thing as overproduc- 
tion nor a general business failure; for there would be 
goods to exchange for all goods. Yet the influence of any 
given industry is far-reaching and wide-extended in rela- 
tion to other industries, and the failure of one may 
bring an overstrained condition of affairs and lead to de- 
pression in others, which in turn may lead on to panics, 
and loss of confidence in trade. 

Protective Tariff and Panics. 
Fundamentally, protective tariffs are not the cause of 
panics, though they may help to precipitate them. Any 
sudden tariff changes will in their arbitrary interferences 
with the laws of trade have a tendency to create an un- 
settled condition of affairs, lead to trade depression, and, 
if the market is over-sensitive, to a crisis and panic. The 
history of our own country shows that this is true. On the 
other hand, where there have been slow changes in the 
tariff there has been no real detrimental effect upon busi- 
ness. We find, too, that panics come and go, whether we 
have high tariff, low tariff, or free trade. The panic of 
18 57 was caused by over-activity in trade, excessive specu- 
lation, over-banking. Immediately, in the same year, a 
tariff was framed to held avert the threatened panic. But 
it had a contrary effect; it unsettled rates of goods when 
prices were already unstable, and intensified the panic by 
throwing certain industries into confusion. It will be 
noticed in this that all the conditions of a panic were evi- 



ECONOMICS. 



383 



dent before the tariff bill was formed; all it did was to 
intensify the evil, rather than restrict it. Again, the 
tariff of 1846, which was called a revenue tariff, being a 
reduction from the old tariff of 1842, brought about va- 
rious changes. In the attempt of the people to readjust 
themselves to the changed conditions, the causes of the 
panic of 1848, which followed, were intensified ; but it was 
of short duration, and the upward movement started again 
in the following year, 1849. The results of the reduced 
tariff of 1872, and of the increased tariff of 1883, and of 
the McKinley bill of 1890, are readily observed. In each 
case they failed to bring steadiness to the market. 

You will observe that the panics occurred immediately 
after these great changes. The tariff law of 1872 and the 
panic of 1873, the tariff law of 1883 and the panic of 
1884, the McKinley bill and the panic of 1890, and the 
Wilson bill and the panic of 1893, came together. Now 
we must not infer, because all these occur together, that 
they stand in the relation of cause and effect, for fre- 
quently the panic has been the cause of the tinkering with 
the tariff. But the tinkering with the tariff to modify 
the condition of panics has been generally a detriment to 
the whole community. Without doubt the McKinley bill 
induced a great deal of buying from European markets, 
and overstocked our own, prior to the enforcement of the 
high tariff on certain lines of goods. These lines of goods 
became cheap, business dull ; and it would not do to infer 
that this McKinley bill was a fundamental cause, or indeed 
a cause, of the panic of 1890, although it intensified the 
depression. It is impossible to deny from any historical 
standpoint, that the Wilson tariff law had a very potent 



384 ECONOMICS. 

influence in intensifying the evil results of the panic of 

1893. 

History of Panics in the United States. 

It will be impossible for me to give a complete history 
of the panics in the United States, but I will refer rather 
specifically to our business course since 1873, for it is from 
this point that the financial troubles of '93-96 really date. 
At the close of the civil war we were still in the paper- 
money era, which had served to greatly inflate local prices. 
Also, special lines of manufacture had reached a high grade 
of development, and at the close of the war a large number 
of men turned their mental and physical energies to the 
development of the resources of the country. The result 
was a rapid and somewhat fictitious movement in business ; 
and I may say here, that the difficulty with rapid move- 
ments in business is, that the different parts of the busi- 
ness world do not have time to readjust themselves to the 
new conditions, and the result is weakness and failure 
on the part of some, which tend in turn to break down 
others. There was considerable movement, too, in the 
speculative market. The railroad-building which had 
begun so vigorously in the latter period of the sixties was 
continued along into 1873 with great rapidity. In that 
year 4,190 miles of road were built, at a cost of $121,- 
000,000; or in the period of 1868 to 1873, railroads were 
built at a total cost of $1,700,000,000. This absorbed a 
vast deal of capital of the country, and led to an over- 
strained condition of business. A gradual return to specie 
payments tended to a shrinkage in prices, and there was 
a decided depression in the money market in ISTovember 
and December of 1872. During this period the lowest rate 



ECONOMICS. 386 

of discount was 7 per cent., and in December it was quoted 
at 1-32 of 1 per cent, to l-i of 1 per cent, a day. People 
entered the new year with a hope of a return of better 
times; the interest declined a little, to six or seven per 
cent. Soon the old rate of 1-32 of 1 per cent, a day reap- 
peared, and continued to the month of May. By April, 
the air was full of the symptoms of a panic, which was \ 
precipitated by the 15th of April. There was a slight re- 
covery in May, but a severe relapse in September. The de- 
mand for money was excessive; it could not be had at 
any price ; some few loans were made on the culminating 
day at 1 1-2 per cent, a day. In September the panic 
broke forth under the notorious failure of Jay Cooke. It 
was a miserable year, during which prices were excessively 
high in all branches of business. Loans which had been 
made for completing railroads followed one another so 
rapidly and created such a demand for money, that from 
the month of October, 1871, to the month of May, 1873, 
they could not be placed at a lower rate than seven per cent, 
interest; and the issue of railroad securities became so 
unsalable that bankers succumbed beneath the burden. 
This was a great misfortune to all the railroads. In the 
commercial world affairs were not so bad as was feared. 
On the 20th day of September, for the first time, the Stock 
Exchange of New York city was closed for ten days, 
during which legal-tender notes were at a premium of 1-4 
per cent, to 3 per cent, above certified checks. On the 
18th there was a run on the deposits, continuing on the 
19th and 20th, especially by the country banks and the 

bank correspondents. No security could be realized upon, 
—25 



386 ECONOMICS. 

and in order to relieve the situation the Secretary of the 
Treasury bought $13,500,000 of national 5-20 bonds, stat- 
ing that he could do no more. The banks finally passed 
their most critical period October 14th, when out of $32,- 
218,000 legal-tender dollars at the beginning of the panic, 
only $5,800,000 remained on hand. It was not until the 
month of iNovember that the decline stopped, and a slight 
advance began to take place. Throughout the entire panic, 
the bank reserves were much below the legal requirements 
of 25 per cent. The ISTew York Clearing House came for- 
ward and issued clearing-house certificates to the amount 
of $26,565,000, and made a common fund of legal tenders 
belonging to the associated banks for mutual aid and pro- 
tection. It is thought that this measure prevented a great 
disaster. Discounts, which were $309,000,000 in Sep- 
tember, 1871, had fallen to $278,000,000 in September, 
1873, on the eve of the panic, and they were finally re- 
duced to $250,000,000. Deposits, which were $248,000,- 
000 in July, 1871, fell to $198,000,000 in September, 
1873. At the last point of the panic, when suspension 
was universal, deposits had declined to $89,000,000. 
Great speculators, with Vanderbilt at the head, formed a 
syndicate and made prices to suit themselves; but the 
death of Mr. Clark, in June, and the failure of George 
Bird Grinnell, brought about its dissolution, and the 
liquidation of this great concern kept down prices for a 
long time. Then followed a long period of gradual recov- 
ery of business, and slow liquidation. By 1878, confi- 
dence was restored, and in 1879 business was again flour- 
ishing. From 1879 to 1884 were five years of great 
prosperity. The last date terminates the history of the 



ECONOMICS. 



387 



prosperity period, and marks the beginning of a new 
crisis. 

During this period, the most gigantic speculations in 
railroads had occurred. The zenith of the movement was 
in 1880, which was followed by a slight retrograde move- 
ment after three years marked by declining prices. The 
cause was the extensive building of new lines of railroads, 
the necessity of lowering rates, and the manipulation 
of railroading by the managers on a great speculative 
scheme. In May, 1884, the storm burst upon the business 
world, and several houses went down. Then followed the 
suspension of banks, beginning with the Marine Bank on 
May 5th, and the Metropolitan a week later, with a large 
number of banks and houses of the second order following 
in its train. The banks and the Clearing House were the 
first to be attacked, but they formed themselves into a 
syndicate to resist the storm which was causing failure 
all around them. Checks were no longer paid, and set- 
tlements no longer took place; consequently, credit circu- 
lation was suspended. Clearing-House certificates again 
availed to settle trade balances. In the industrial world 
we find that 1883 was disturbed by numerous failures. 
Though there had been no sudden decline in prices, 
they could scarcely be held in their places, and just before 
the breaking-out of the panic there was great complaint 
of the accumulation of goods in the warehouses and the 
difficulty of making exports. Gold flowed away from the 
coffers of the country, and cash on hand decreased each 
day. On the first day of January, 1884, by the order 
of the court, the JSTew York & 'New England Railway was 
placed in the hands of a receiver. The Xorth River Com- 



388 ECONOMICS. 

pany followed soon after, on the 12tli of January. Many 
houses exhibited their balance-sheets. On May 6th the 
jSTational Marine Bank failed, and then the house of Grant 
& Ward, which went down with a liability of $17,000,000. 
On the 13th of May the president of the Second 
JSTational Bank of New York was forced to suspend 
payment, with a liability of $3,000,000. It was the 
final blow to credit; exchange became impossible. Trade 
operations were suspended; securities were plenty, but 
money was lacking. The rate of discounts and loans 
rose to 4 per cent, a day, in the worst period of the 
panic. No ready money could be counted on by anyone 
at any time ; offerings were made upon the stock exchange, 
. with no takers at any price ; everything was disorder and 
confusion; houses and banks continued to go down in the 
midst of a great tumult. It was not until the banks and 
the Clearing House formed a syndicate that things began 
to settle down and distrust to diminish. Finally, a rise 
in the discount rate attracted foreign capital little by 
little, and exchange grew easier. With the help of the 
syndicate a good credit was established, and the rate of 
discount declined to 5 per cent. This panic was general 
throughout the United States, but it was rather a panic 
of securities, than an industrial crisis. People had failed 
to observe the slowly declining prices from 1882 to 1884, 
and were unprepared for the storm which burst upon 
them. The panic in Europe in 1882 had checked the rise 
of prices and started their decline, so that the storm was 
really gathered two years before it burst. One of the 
fundamental causes of the precipitation of this panic was, 
that the banks had made immense loans on the shares of 



ECONOMICS. 389 

the new railroad issues, in order to advance the prices on 
the stock exchange. Just at this juncture, the railroad 
earnings, instead of increasing, showed a weakness and 
suffered a slight reaction ; and as soon as these artificially 
maintained quotations began to drop a little, everything 
became unsalable and the whole edifice crumbled. Up to 
this time excitement had prevailed, and the rising in 
prices had caused every one to buy. The moment the 
advance was arrested, everybody reversed his determina- 
tion, and wanted to sell. Bankers had invested not only 
their capital, but some of their clients' deposits; and all 
the brokers were interested in the speculation which 
brought them business and kept things booming until the 
collapse came and business ruin followed. But low prices, 
and the outlook for a fine harvest, gave courage; con- 
fidence began to be restored, and a resumption of business 
followed. It was not long before the normal state of busi- 
ness returned. 

Business continued to advance until 1888. This was a 
prosperous year, although securities became heavy and a 
general depression in business followed, and some stocks 
shrank immediately. There came however a sharp specu- 
lation in wheat; copper had declined to a large extent; 
and the French copper syndicate, holding up the prices 
for a time, finally collapsed, and caused a certain fluctua- 
tion in business. Crops were large, with the exception of 
wheat; the cotton manufacturing was extensive. There 
was a slight decline in the pig-iron production ; decline in 
the production of petroleum, by agreement; and a heavy 
one in Bessemer iron. There was a large export movement 
in 1889 in cotton, the greatest since 1880. The new tariff, 



390 ECONOMICS. 

whicli came into operation in 1890, introduced a large im- 
port of goods. The volume of business in 1889 was the 
greatest ever known in the history of the country. Rail- 
road earnings showed a wonderful recovery, and many re- 
ports gave the largest figures ever recorded in this business. 
There was plenty of work ; good wages, fair prices. I^ever- 
theless, there were indications of a coming depression. In 
the middle West the farm-mortgage pressure was excessive. 
There was a decline in the anthracite-coal production; 
there were low prices for corn and oats ; speculations, too, 
were growing smaller. The bank reserves were getting 
low towards the last part of the year, and there was a heavy 
absorption of investment securities; a large amount of 
gold — more than $37,000,000 — was exported in the first 
six months of the year ; failures were becoming numerous, 
exceeding those of 1888 by 203; there was a bad decline in 
the woolen trade ; the importations surpassed all previous 
years, and the net export of gold amounted to nearly $40,- 
000,000. Unused deposits, capital surplus and undivided 
profits were getting very small in the banks in comparison 
with the large number of loans and discounts shown at the 
end of the year. A close work in banking began, while 
the demand in the South and West for currency was very 
great. It was in this condition that the year 1890 opened, 
with a constant pressure for bank accommodations. There 
was an excessive volume of transactions of all kinds, but 
there was not enough money to keep up with the overtrad- 
ing. The Secretary of the Treasury threw a million dol- 
lars a day into the market for a period of seventy days, for 
the purchase of government bonds. The railroad mag- 
nates met and tried to sustain the price of railroad securi- 



ECONOMICS. 



391 



ties against an oversnpply of them. These two move- 
ments only delayed the coming crisis. The debates on the 
silver question led to false hopes of cheap money, and made 
a delusive shrinkage on account of the promise of high 
prices, and led to speculation. The Buenos Ayres crisis 
created a great demand for money in England, and Eng- 
land sold her securities in our market, taking gold therefor. 
Although we had a large cotton crop, the oats, wheat and 
corn crops were small. Failures began to appear in !N^ew 
York, and the embarrassment of the Baring Bros, in Eng- 
land intensified the panicky condition of affairs. Rail- 
road-building had increased to a large extent, 6,081 miles 
being laid in this year, and the new securities were 
barely absorbed. This had a tendency to depress the mar- 
ket. The huge imports to take advantage of old tariff 
rates absorbed a vast deal of money. The silver bill cre- 
ated some distrust abroad, which made a decline of $123,- 
000,000 in circulation and in specie reserve of $178,000,- 
000. Discounts and loans rose to $1,932,000,000. The 
panic was of short duration, and the following year 
liquidation and recovery took place, confidence was re- 
stored, prices began to advance, and there was a feeling 
of general prosperity. 

In 1892 we had a fair business year, and the year 1893 
began favorably. But, in the midst of the apparently 
favorable condition of affairs, a sudden panic burst upon 
the people. The great cause of this panic of 1893 arose 
from the fact that there was an imperfect liquidation after 
the panic of 1890, — for there is no sure return to business 
prosperity until liquidation takes place. It was not thor- 
ough in its process, consequently a relapse took place, and 



392 ECONOMICS. 

the relapse proved worse than the original disease. The 
movement was precipitated before its natural time, on ac- 
count of the influence of Argentine and the Barings; but 
it was arrested on account of other influences, such as 
large crops and favorable condition of manufactures. It 
was again suddenly precipitated on account of the scar- 
city of money, excessive rise in gold, and the continual fall 
in prices. The suspension of free coinage in India intensi- 
fied the importance of our own silver question in America, 
as did the unrest and discontent engendered by the threat- 
ened sudden and radical change in the McKinley tariff law. 
In all this must not be ignored the fact that in certain in- 
dustries there was a stimulation of production clear beyond 
the ability of the other portions of the world to absorb. 

Management and Prevention of Panics. 

Enough has been said to show the nature of panics, and 
to reveal their causes. Is it possible to remedy them 
when they are once upon us ? The Bank of England has 
a way of discouraging excessive borrowing, by raising the 
rate of discount. In the United States we have no such 
plan, except as it occurs through natural laws. If the 
Bank of England fails to discourage excessive extension 
of credit, it simply by permission issues a large amount 
beyond the bullion reserve; that is, notes are issued on 
other securities. This gives the bank reserves or supplies 
the outside demand. There are only two ways to make 
a panic subside: one is to lessen th.e demand for credit, 
the other to increase its supply. Both should be tried 
in every way. We have seen that the 'New York banks 
combine their reserves and issue clearing-house certificates, 



ECONOMICS. 



393 



so that they stand together. The government has fre- 
quently relieved the pressure by the purchase of govern- 
ment bonds. If all banks would pay out as fast as possible 
they would be able to turn the tide of a panic, provided 
that they were all united in one system. 

But the prevention of the occurrence of panics and in- 
dustrial crises is a much more difficult matter. If we 
should agree with the theory of Mr. Jevons, that they 
are caused by the sun-spots, then how shall we regulate 
the sun? Or if we conclude that they have deep-seated 
causes resting in the nature of modern organized society, 
how shall we change the organization of society ? Crises 
have been classified as credit panics, capital panics, and 
panics of circulation. If the credit system is responsible 
for these business diseases, how shall the credit system 
be improved ? Delicate and sensitive as it may be, I am 
convinced that improvements might be made in our credit 
system so that it may be more stable and uniform and 
be open to fewer irregularities. Our banking systems 
are far from being perfect. They may be greatly im- 
proved. In case of a defective circulation, it is believed 
that the nations of the world could make a currency which 
would be more stable and cause less fluctuation in the 
market, and in most cases the circulating medium of most 
governments could be greatly improved. As to the great 
lack of capital causing panics and depression, there seems 
to be no real remedy for that except in a decline of the 
speculative spirit. A slight remodeling of human nature 
— who will undertake the task, so that there will be less 
capital destroyed in speculative enterprises induced by 
people who have great hope of sudden wealth ? Millions 



394 ECONOMICS. 

are sunk every year that yield no return. If we do not 
want sudden downfalls, we must be contented with a 
slower pace, with smaller margins and less business, 
on a surer foundation. But if we consider industrial 
crises in the scientific sense, we enter a still more diffi- 
cult field. The foundation of specialized or capitalistic 
production is touched in the consideration of the causes or 
the prevention of these recurring industrial phenomena. 
Mr. Giffen asks the question, "Why is trade depressed?" 
Should not the question rather be, "Why is trade ever 
prosperous ? To keep in full employment the compli- 
cated machinery of a highly complicated industrial com- 
munity like that of England; to have matters so ordered 
that at a given time there is an excessive demand for 
labor and capital in all branches of industry, and hardly 
any individual willing to work, in fact goes without em- 
ployment; and to have all of this accomplished by volun- 
tary association and competition among the units with 
which society is composed, each pursuing his own interest, 
and laboring to produce what he believes other people will 
buy, is surely a miracle so astounding as to excite per- 
petual surprise that it should be performed." He says 
that "the marvel is not at all diminished by the fact that 
under no other conceivable system, socialistic or other, 
could the same results be achieved." In a less complicated 
system a depression in business is no marvel. Take an 
agricultural community, and one single failure in crops 
is sufficient to produce depression, and in olden times a 
famine. About forty-eight years ago Ireland had a bad 
harvest, which produced a famine of the old style. But 
when society is wholly tied together through a varied and 



ECONOMICS. 



395 



complicated industry, a bad harvest, though less radical 
in its results, has its effects all along the line of competi- 
tive industry. And the slightest decline from the maxi- 
mum price sets up an outcry about depression. It has been 
stated with some truth, that it frequently occurs that 
when people complain the most, times are really the best 
when considering the ultimate good to society. Grind- 
ing economy, shortened income, loss of property and fail- 
ure may not be comfortable things to think of in a per- 
sonal way, but society at large is learning the rough lessons 
of experience. 

References: Max"Wirth,Handelnskreisen ; Juglar, A Brief His- 
tory of Panics; Walker, Political Economy; Jones, E. D., Economic 
Crises. 



396 ECONOMICS. 



CHAPTEE VIII. 
SPECULATION. 

Oompeusatiou for Bisk. 

Every business enterprise involving capital, labor or 
land is accompanied with more or less risk. The modern 
system, by which the estimated wants of a community are 
determined by business managers, in itself involves risk. 
There is an estimate of the kind, quality and amount of 
goods demanded by the people. If the manufacturer fails 
in his estimate, and produces a kind of goods which has 
been superseded by something else or has been superseded 
by goods of a different quality, his goods fall upon the 
market untouched, and there will be an insufficient amount 
of returns to the business to pay the interest on capital 
and the wages of labor, and he will get nothing for his 
risk. Also, if a manufacturer overestimates the market 
and creates more goods than are readily absorbed, he may 
for a time feel the depression; and if those goods are in 
turn superseded, the market will not be able to absorb the 
entire stock. 

It is sometimes said that even the farmer takes a risk 
when he tills the soil, for he must be dependent upon the 
climate for his success in the enterprise. It is true of 
every legitimate business involving the various factors of 
production. But more especially is this observable in 
trade, for the tradesman must make a careful estimate 
of the needs of the community, and also of the amount 



ECONOMICS. 



897 



of each kind of goods that it is likely to absorb within 
a given time. If he fail in this estimate the tradesman 
will find it difficult to satisfy the demands of his own 
business, and consequently will not have sufficient income 
to pay interest, rent, labor, etc. This principle explains 
very clearly why it is that the profits of both the manu- 
facturer and tradesman appear to be so high: it is a 
reward for risk, and, owing to this, the nominal profits 
must be estimated very high. 

Now there are two reasons why so many failures occur 
in business along this line: first, because business mana- 
gers are not capable of estimating the market; and, sec- 
ond, they are unable to realize high enough profits to 
cover this element of risk, — therefore the weak members 
of the so-called business fraternity fail while the stronger 
survive. It might be said incidentally, that this is one 
reason for the great concentration of wealth under our 
present system. People see in it the avarice and greed 
of certain individuals who seek to destroy others in busi- 
ness. In the open market it is to a large extent the sur- 
vival of the fittest; and as the number of the unfit to 
do business is very large, it is quite in keeping with the 
speculative system that thousands should fail in their 
enterprises. It will be found, also, that those persons who 
do succeed are those who are willing to sacrifice their 
own comforts in life by saving to gratify their ambition. 
It is ambition for wealth and power that really makes a 
very strong element in the creation of their fortunes ; and 
this, coupled with the idea of business capacity on the 
one hand and the large compensation necessary to be set 



398 ECONOMICS. 

aside for risk on the other, makes this inequality of 
wealth in the community. If it is necessary to have a 
large comiDensation for risk and a certain man succeeds, 
then his wealth accumulates rapidly; and if he succeeds 
once where others fail, his opportunities for success are 
multiplied. 

It is idle to argue that because all business is accom- 
panied by risk, all speculative enterprises are legiti- 
mate, for if too much risk is taken we find a tendency 
to create fictitious values; so that when speculation is 
carried to an excessive extent it becomes nothing more 
than a kind of gambling. ISTow the difference between 
gambling and real business is not easy to determine. 

Legitimate and Illegitimate Speculation. 

It is difiicult to say where speculation passes into 
gambling, for the reason that a line cannot be drawn 
determining how much risk should be taken in business. 
There is, however, a clearly marked species of specula- 
tion which can be classified as gambling. Gambling is 
in itself a process of distribution; it is an economic 
category of fortune. Two men sit down at a table before 
a pile* of gold. By the manipulation of cards with skill 
or trickery or fraud, one obtains the gold and the other 
loses it. All that trade which tries to get a share of the 
product of industry without rendering any definite service 
to human society may be called illegitimate speculation, 
and is analogous to gambling. Where people attempt to 
manipulate the market by forcing prices up or forcing 
them down, where they attempt to make "corners" in the 
market or by monopoly power seize excessive margins, 



ECONOMICS. 



399 



it is nothing more than the exploitation of humanity, 
forcing it to contribute to a superior skill in distribution. 

Why Gambling is Detrimental. 

The chief objection to gambling is not an economical 
but a moral consideration, for from a directly economic 
standpoint the detriment to economic society is not great. 
Inasmuch as it encourages idleness and vice and destroys 
a large projDortion of the productive power of the com- 
munity, its economic influence is bad. Even the moral 
influence caused by the attempt to get something for 
nothing leads to a breaking-down of the economic system. 
In so far as gambling interferes with legitimate trade, it 
creates an uncertainty to economic life. But if a group 
of men on Wall Street struggle with one another for cer- 
tain margins in the buying and selling of stocks, — if some 
gain and others lose, the business world is not greatly in- 
fluenced thereby, any more than when a large number of 
men play poker in which some gain and others lose. 
The difference is plainly that in gambling no service is 
rendered to the community, while in legitimate business, 
though some gain and others lose, the losses are even more 
disastrous than the losses of gamblers; but still, by the 
process of legitimate trade or manufacture, some service 
is rendered to the community, even though certain indi- 
viduals lose. 

The moral effects of gambling are far-reaching. The 
development of that idea of expectancy destroys the nor- 
mal condition of the individual. It is far different from 
that hope of reward founded on service to the community. 
But speculative trade may be serviceable. If people buy 



400 ECONOMICS. 

grain at a low price with the hope of selling at a high 
one, they are anticipating the wants of the people and 
intending to supply them. If individuals buy lands to 
hold until there is a rise in value, it is also along the 
legitimate process of trade; in fact, they are bought and 
sold with the idea of a margin of profit. If large quan- 
tities of mining stock are bought with the expectation of 
a rise in value without actual development of the mining 
property, the rise must be determined by some fictitious 
manipulation in the market, and this speculation must be 
disastrous. 

But this buying and selling of goods on the market and 
satisfying future delivery has a tendency to make the 
market stable, and thus renders a great service. Suppose 
one man should anticipate a large shortage in wheat and 
he should buy a large amount of wheat, hoping to hold 
it till that time, l^o one else discovering this, he would 
buy at a very low price, and when the shortage came he 
would sell at a very high price. But the tendency is for 
all business men to observe the same causes and effects 
in business; and instead of one man, suppose a thousand 
men anticipate this shortage in wheat and attempt to buy 
the surplus. Two things will happen: first, in any pur- 
chase of wheat there will be competition of buyers, and the 
present price will rise; second, when delivery-time comes 
there will be competition in selling, and prices will tend 
to fall. In other words, there is a stability of values fixed 
in this delivery of future goods. This very fact that the 
brightest business men of the country estimate the amount 
of available gooda at present and in the future, and the 



ECONOMICS. 



401 



extent of the normal demand at present and in the future^ 
tends to regulate prices, and that estimated price regulates 
to a large extent the amount of production. Hence it is 
that the laws of supply and demand are carefully esti- 
mated, and stability given to production and distribution, 
and consequently to prices. 

Trade in "Futures." 

The trade in " futures," that people talk so much about, 
is, when carried on properly, a blessing to both the 
producer and the consumer. Formerly, people in trade 
made their margins largely on account of the difficulties of 
transportation on the one hand and the lack of informa- 
tion on the other. Great caravans started across the con- 
tinent, involving a great risk in reaching their destination. 
When they did succeed, goods were sold at enormous 
profits. The ancient merchant ships that plowed the waves 
under great difficulties and dangers, running great risk 
from freebooters, pirates, storms and stress of sea, finally 
obtained enormous prices for goods; but cheap transpor- 
tation has destroyed all this. A large amount of goods 
can now be readily thrown from one part of the country 
to the other, or from continent to continent, with little 
expense. Quick communication by telegraph accompany- 
ing cheap transportation enables merchants to estimate 
prices in London and 'New York, so that people will not 
pay high prices through ignorance of the market value of 
goods. The result is, that a stability of value is fixed the 
world over, varying only on account of the cost of trans- 
portation ; and margins in business in both manufacturing 
and trading grow smaller each year, and more stable. 

—26 



402 



ECONOMICS. 



These margins are reduced largely to the actual service 
rendered humanity in the jDroduction and exchange of 
goods. 

The evil results of this exchange in futures are found 
largely where people trade without any intention of de- 
livering the goods, hence without any intention of ren- 
dering any direct service. It has developed two groups 
of traders, known in the market as "bulls" and "bears." 
The former hope by excessive buying to create a demand 
for goods and thus increase the price. While the regular 
investor buys with the expectation that the property will 
become more productive, the bull buys with the expecta- 
tion of forcing prices higher, or that by means of certain 
financial organizations values may be enhanced. The 
bears, on the other hand, seek to depress prices by organ- 
ized speculation. They sell for future delivery without 
owning or even possessing, at the time of the sale, the 
goods which they sell. This trading leads to an attempt to 
corner the market for illegitimate gains. People simply 
pay the cash balances without any intention of handling 
the goods. There can be no gain in turning goods over 
and over in the market before the delivery, that certain 
bulls, by advancing prices, may make a margin, or certain 
bears, by depressing it, can ultimately realize a margin. 

The illegitimate form of trading called "cornering the 
market" is nothing but a trick of the gambling process. 
By it buyers seek to obtain control of the entire market 
and force prices higher after obtaining control, hence 
those persons who have to deliver goods are short in their 
delivery and in danger of ruin. Large numbers having 



ECONOMICS. 403 

agreed to deliver goods on a margin are thus unable to 
make their purchases, and are consequently short on de- 
livery. The result is, that many are forced to go out of 
business. It also has the bad effect of raising the prices 
to consumers, and frequently causing great distress; for 
such gambling is applied to the necessaries of life, such as 
coal, wood, corn, wheat, petroleum, etc. 

Speculation in Productive Industry. 

In the world of f)roduction there is a vast deal of specu- 
lation. Companies are formed for the manufacturing of 
certain lines of goods, for the exploitation of mines, for 
the building of railroads and other means of transporta- 
tion. 'No one can tell just what will be the result of any 
enterprise of this kind, and people put their money into 
such concerns with a good deal of risk. The speculative 
element enters largely into mining, and into some manu- 
factures. The essential business principle to be observed 
is always to reduce this risk to a minimum. Here, as 
elsewhere, the greater the prospect of large gains the 
greater the risk that will be taken. There are now passing 
up and down the country men called promoters, who per- 
suade capitalists and business men to go into certain enter- 
prises with a prospect of large gains. This is a peculiar 
form of speculation, and the last great result of this kind 
of speculation is found in the modern trust and the pur- 
chase and sale of certain forms of stock. As the trust is 
discussed in another place in this work, it is not neces- 
ary to elaborate this form of speculation. It will suffice 
to say, that this is a special organization of productive 
forces with the hope of great gain, and involves to a large 



404 ECONOMICS. 

extent the principle of monopoly. Many of these specu- 
lative organizations will fail because of the overestimated 
power of earning pictured to the investors by the pro- 
moters. The speculative market will be infested with this 
species of stock, which will fail to yield a return to the 
investors, and sooner or later there will be a collapse in 
the business. Over-organization industrially has a tend- 
ency to destroy some forms of manufacturing, but it has, 
as in trading, a tendency to create stable values for manu- 
factured articles because it more clearly estimates the 
wants of the people and can more exactly supply them. 

Moral and Economic Effects. 
The moral and economic effects here are the same as in 
trade. Wherever the risk is taken ordinarily for the pur- 
pose of supplying the legitimate demands of the industrial 
world, industrial speculation is legitimate. Wlierever it 
exceeds this for the purpose of creating goods which may 
not be demanded, it has gone into exploitation of the 
property already existing, and is simply a new process 
of distribution. The economic effect of the former is to 
give stability to wholesale prices and to more carefully esti- 
mate the demands of the people. It will also be a means 
of progressive development in manufacturing. The specu- 
lative enterprise trying this form of manufacture, then, 
making a careful study of what goods will satisfy human 
desire and seeking at all times to reach a more perfect 
satisfaction of the wants of the individuals, will tend to 
develop more rapidly the industrial pursuits and to en- 
courage industrial progress. 



ECONOMICS. 405 

Insurance. 

The question of insurance for risk is very important. 
Every business man must set aside enough surplus to 
insure against bad years or bad ventures in either trade 
or production. Companies are formed for insurance 
against losses. This has nothing to do with gambling, or 
illegitimate speculation of any kind. It is merely a legiti- 
mate business insurance against risk. It becomes a source 
of security to business men, and tends to create industry, 
permanency, and efficiency. Insurance thus renders a 
public service, while the lottery, the pool, the policy-shop 
or the bookmaking enterprise is an attempt to obtain gains 
through the process of illegitimate speculation. 

Remedies. 
It is easy to make laws against gambling of all forms, 
but difficult to enforce them. It is quite easy to define 
certain forms of gambling, and thus to determine whether 
persons are violating the laws, but to apprehend and con- 
vict the same, meting out to them the penalty of the law, 
is more difficult. But it is very difficult to distinguish be- 
tween legitimate and illegitimate speculation; hence it is 
difficult to establish a law which will properly regulate it. 
Therefore all legislation against the speculative market 
is liable to prove disastrous, for it may interfere with that 
legitimate trade in securities or produce which has ren- 
dered stability to the market. The only hope is to edu- 
cate the business sense which will guard alike against ille- 
gitimate speculation in trade or industry, and will cause 
people to enter only those enterprises which are rendering 
a distinct service to humanity in production or transporta- 



406 EGOlyTOMICS. 

tion or excliange, and for which an ordinary and legitimate 
return may be expected. But society may be protected 
by certain laws which shall insist that neither individual 
nor corporation nor trust shall exploit humanity by a 
process of refined robbery, but that the business enter- 
prise shall seek to develop the resources of the country, to 
manufacture necessary goods, or to engage in legitimate 
trade, or to perform such services of transportation and 
other enterprises as shall yield a definite benefit to human 
society. This may be done by educating the business 
sense of the community, and by creating certain restrictive 
laws which shall be regulative, preventive, and educative 
in their nature. 

References : Hadley, A. T., Economics ; Divine, E. T., Econom- 
ics ; American Investor ; Bradstreet's Reports, etc. ; Duguid, The 
Story of the Stock Exchange. 



ECONOMICS. 407 



CHAPTER IX. 

TRANSPORTATION. 

Effects of Transportation. 

While the great original sources of wealth are found 
in the resources of nature and in the application of labor 
to raw material, the means of transportation affect values 
in exchange quite as much as the cost of production itself, 
for the means of supplying the demand in the market fre- 
quently determine the price of goods. As society becomes 
more comj)lex we depend more and more upon the facility 
with which the goods are brought to the market; or by 
which we may be carried to the goods. In former times, 
when people wanted anything they went where it was; 
now, they bring it to them or go to it as they please. 

"Wealth is greatly enhanced by transportation. The 
gold in the heart of the mountains is of no practical value 
until it is brought to the light and carried to a place of 
use. The expenses of transportation must in general be 
added to the original price of the goods. Kansas corn, 
having supplied the home needs, is of little value until 
transported to a place of use. Should transportation sud- 
denly be stopped a month in some localities, commodities 
would reach fabulous prices, while in others they would 
command no value at all. Thus in modern life are we 
dependent upon transportation for both necessaries and 
luxuries of life. 

The facilities for transportation tend to increase the 



408 



ECONOMICS. 



division of labor. Living alone, man must produce alone 
food, clothing, and all articles of use and luxury; while 
bj means of transportation he may- apply his whole time 
to one thing and receive the benefits of the combined 
labor of the world. The poorest workman in one of our 
cities lives on the products of the world. It takes the 
products of both hemispheres to supply his needs. The 
wool that makes his coat comes from one place, the coat 
from another; the leather that makes his boots from one 
section, and the manufactured articles from another. His 
tea is from China, his coffee from Brazil, and so for every- 
thing he uses. Hides are shipped from Kansas City to 
'New York and from New York to E'orth Carolina to be 
tanned, then back again to IsTew York or Boston to be made 
into boots or shoes, which are again reshipped to Kansas 
City to be consumed by wear. By this double transporta- 
tion and repeated combinations of labor the price of the 
manufactured article is greatly increased above the cost 
of the raw material. 

Prices Equalized. 
Rapid transportation of goods tends to equalize prices, 
while, as was stated above, the price of the goods in the 
market is regulated by the relation of the supply to the 
demand. With our facilities for exchange and transpor- 
tation the price of staple articles always tends to reach 
the cost of production. The prices of dry goods in Eastern 
and Western cities tend to be the same as transportation is 
cheapened. So, likewise, the prices of Western products 
will be less in the markets of the East as transportation 
is quickened and cheapened. 



ECONOMICS. 409 

What advantages are there, then, in cheapening trans- 
portation ? First, anv increased demand for goods will 
give the seller the advantage and not the transporter ; and 
secondly, goods received in exchange can be laid at jour 
door at less expense. This is the same as receiving a higher 
price for the articles sold in exchange. 

Equalizing Industry. 

One of the greatest effects of cheap transportation is 
the opening up of new lands and the extension of agri- 
culture. The rapid development of the Mississippi Valley 
and the far West could have been made possible only by 
the magnificent system of railroads which brought home- 
seekers to the imcultivated fertile lands. This process of 
agricultural extension has without doubt been carried on 
too rapidly to be conducive to the highest development of 
agricultural production. The opposite is also true, that 
a system of cheap transportation tends to concentrate 
manufactures in cities and in the most favorable localities. 
Truly, it has often been said, the railroad is a city-builder 
or a city-destroyer, as the case may be. The effect of rapid 
transit on population is especially observable in our mod- 
ern cities, where the residence portion of the city is widely 
scattered for miles from the center of business. On the 
other hand, in the business portion of the city population 
becomes compact or concentrated. 

Economic Value of Cheap Transportation. 

All of the foregoing propositions tend to show us what 
a great wealth-producer commerce is, and how rapid and 
cheap transportation affects every department of economic 
life. Consider the limitations that would be set upon a 



410 ECONOMICS. 

country isolated from other countries in modern economic 
life, and it will be seen that the value of cheap transporta- 
tion cannot be overestimated. In looking back at the de- 
velopment of the West, because of the railroads which 
opened and developed its fertile valleys and its mines, the 
power of transportation is readily seen; but the question 
is as important to-day as ever. We are still seeking the 
cheapest transportation possible for the goods we have to 
sell, and also for those we must import from other places. 
Those countries which are fortunate enough to have 
water-ways find thereby a great saving in transportation. 
By this means heavy freight, such as stone, iron, and 
grain, can readily and cheaply be moved, while lighter 
articles of freight can be left for railroad transportation. 

Advantages of Water Transportation. 

In all cases where heavy freight is to be moved and 
rapid transit is not absolutely demanded, water communi- 
cation is much cheaper and better than railway. 'No 
mechanical constructions have yet been invented which 
can compete in the matter of cheapness with transporta- 
tion over or through deep waters of lake or ocean. The 
friction caused on a dry road-bed cannot compete with it 
in respect to expense, and the deeper the water the cheaper 
the transit, other things being equal. 

Thus, freight can loe carried on the ocean by means of 
twenty-five feet draught at the rate of one-half of one 
mill per ton per mile; while in the great lakes, with 
from fourteen to sixteen feet draught, the cost is one and 
one-half mills per ton per mile. If we consider the Erie 
canal as the best example of canals in America, the 



ECONOMICS. 



411 



freight will cost about three mills per ton per mile. Pro- 
fessor Haupt, of the University of Pennsylvania, has 
stated the cost of water transportation in the form of a 
practical law : that "the cost of movement in water varies 
inversely as the draught of the vessel." In 1884 the rates 
by rail from Chicago to IsTew York were 30 cents per hun- 
dred pounds; from New York to Liverpool, 10.5 cents 
additional. The average rate of grain on the railroad in 
1885 from Chicago to New York was 14 cents. By lake 
and canal route it was 4.55 cents. Many more examples 
might be given of the cheapness of water communication. 
The Erie canal has had a great influence in cheapening 
rates of transportation from the ISTorthwest to New York. 
All of the competing lines of railroad have been obliged 
to reduce their freight rates. The lake-and-canal route has 
had a direct influence on all roads parallel, and an in- 
direct influence on the entire trafiic of the North and West. 
If it is true that water communication is so valuable, why 
has it been neglected ? 

Water Transportation Neglected. 

The reason that water transportation has been neglected 
in the United States is on account of the railroad. The 
railroad came into use just as we were attempting a sys- 
tem of water-ways to penetrate the nation. Not very 
much had been done at that time. The canals were but 
little more than ditches ; the rivers had not been prepared 
for deep-water boats; and the lakes had not been fully 
utilized. The result was, that when the railroad was 
built, with such rapid transit everything ran quickly to 
railway trafiic and the water-ways were neglected. The 



412 



ECONOMICS. 



surplus capital of the country went to building railroads, 
and the government did not feel the need of spending 
money for the encouragement of means of water transpor- 
tation. As a result, the water-ways that had already been 
constructed were allowed to decay. ^¥herever competing 
lines of canals existed the railroads bought up the canals 
and destroyed their effective work in a reduction of the 
rates, or else destroyed the canal altogether. The course 
pursued by the railroads has helped to destroy the canals. 
Wherever the water-ways have been maintained, they have 
been compelled to compete with the gradually decreasing 
rates of tlie railroads, and have thus helped to regulate 
freight fares after the manner of competition. There is a 
feeling that even the railroads have made a mistake in 
this matter, for the roads that have run alongside of com- 
peting water-ways have been helped rather than hindered 
by the water transportation. Should the Nicaragua canal 
be built, it will, in the end, increase the volume and 
the income of the transcontinental traffic. It is a mistake 
to suppose that a competing water-way will in the long 
run hurt a railroad. It simply carries the heavier freight 
at so much cheaper rates that industries are stimulated, 
commerce is increased, and the rates reduced. 

Railroad Problems. 

There are many problems relating to railroads in the 
United States. The policy of our nation has been, first, 
to encourage railroads by granting them lands and sub- 
sidies and giving them liberal charters. This has been 
followed by the period of intense competition on the part of 
the railroad, ending in war and combination. Then there 



ECONOMICS. 413 

followed on the part of the states an attempt to regulate 
rates through constitutions, legislative enactments, and 
railroad commissions. Much of this contention between 
the people and the railroad has been shortsighted on the 
part of both, for they have common interests. If the 
railroad works to develop the country, it will reap its own 
reward. On the contrary, if the people work to develop 
the railroad, their country and community will be im- 
proved. 

Abuses of Railroad Management. 

Many questions have arisen concerning the abuses of 
railroad management. In some countries the states own 
and manage their own roads. But in the United States 
we have always had private management ; therefore, until 
government ownership obtain, there is no other way of 
regulating roads but through government restriction and 
control. The chief cause for complaint in America has 
been that freight and fares are too high, and that rail- 
roads discriminate against persons and places in violation 
of their own rules. While many abuses have crept in with 
regard to excessive rates and discrimination, it should be 
said that railroad rates have greatly decreased in the 
United States since 1880, and in most instances have de- 
creased in a greater ratio than the cost of transportation 
has decreased. It should be said that railroads represent 
a system of expensive transportation, and the extent of 
improvements necessary to keep up with competition only 
adds to the extra expense of railroad freights. 

There has been much complaint against pooling. The 
railroads have claimed to be ruined by competition, and 
have resorted to combination. As given by Mr. Hadley, 



414 ECONOMICS. 

this usually takes one of four forms : First, agreement to 
maintain rates ; second, agreement to divide the field; 
third, agreement to divide the traffic ; and fourth, agree- 
ment to divide the earnings. 

The last three methods are known as pooling. Pooling 
has its own dangers and its own benefits. Where excessive 
competition reduces the rates below cost, they must be 
made up sooner or later. This forces railroads to com- 
bine. The unsteadiness of rates is detrimental to both 
shippers and carriers. Therefore, so far as pooling gives 
steadiness to business and adherence to a schedule of rates, 
it is an advantage to railroads and the public. Though it 
is sometimes taken advantage of by roads when excessive 
power is had in competition, this is quite unusual, for a 
good pooling system maintains a better freight rate than 
does excessive competition. 

Another grievance, probably, against the railroads, is 
the manner in which their stock has been capitalized. In 
the early railroad-building much abuse was evident by the 
improper bonding of railroads beyond their actual value 
and the issue of stock beyond a normal amount, thus 
turning out a representation of more property than 
actually existed. This led to a partial deception, and 
entailed great losses upon persons who had invested in 
railroad securities. The railroads were forced into a 
position where they must raise interest on excessive bonds 
and stocks. 

Another grievance, probably, has been that of issuing 
passes. This was begun in a mild way by railroads to 
their employes and their families and various important 
personages, and especially to people doing business with 



ECONOMICS. 415 

their respective lines. But the abuse continued until 
passes were given to any person whose good-will was im- 
portant to the corporation. Thus legislatures, railroad 
commissions, newspaper men, proprietors of summer 
hotels, and agents of companies doing business for the 
railroads, were all given passes. While it was first at the 
option of the railroads, it has become now apparently a 
virtual necessity, for the public " hold up " the railroads 
and demand passes of them. At first, the people fought 
the pass system bitterly. Now, the railroads are more 
eager than the people to get rid of the nefarious system. 
It is bad for both the railroad and public, for it leads to 
distrust in both cases. 

The competition of railroad corporations with each other 
for the business in a given territory has given rise to the 
practice of rebates to large or favored shippers, causing 
great distrust of the railroads. This practice has made 
it possible for the large business to develop at the ex- 
pense of the small one. It is generally conceded that 
railways which receive their first right to existence from 
the state, and which have been declared common carriers 
by the courts, should not discriminate against individuals 
or towns by carrying goods cheaper for one than for an- 
other. It is one of the chief causes of the development 
of the trust, an institution obnoxious to the public. The 
rate bill passed by Congress in 1906 has for its purpose 
the correction of this evil. If it can be corrected, it will 
result in great advantage to both shippers and railways. 
It remains to be seen whether a commission at Washing- 
ton will be able to fix rates on over two hundred thousand 
miles of railway, existing under a great variety of con- 
ditions. 



416 



ECONOMICS. 



Railroad Rates. 

It is a good principle that transportation should be ren- 
dered nearly at cost, so that no monopoly tariffs should 
accrue to the managers. When interest on capital, wages 
of labor, and compensation for managing ability, with all 
expenses, are paid, transportation should have little left. 
For the system should conduce to the greatest public 
prosperity. This means that there should be a rational 
system of freights and fares ; rates should be reasonable. 
The railroads think this means reasonable to them; the 
shippers think it means reasonable to them; whereas it 
means, when properly analyzed, reasonable to both. It is 
right that railroads should receive fair compensation for 
the carrying of freight ; it is also reasonable that shippers 
should have their freight carried at prices commensurate 
with the business they are doing. This problem of trans- 
portation is a very great one. Where population is dense 
and business is almost unlimited, railroads can very read- 
ily reduce their prices to the advantage of themselves as 
well as the people. But in the sparsely settled community, 
where there is a wide extension of territory and a limited 
amount of business, railroading must of necessity be ex- 
pensive, and railroads govern their freights and fares ac- 
cordingly. 

The attempt to fix maximum rates has been nearly a 
failure. There is no reason why the government should 
not fix such a rate. The railroad is a common carrier, and 
to a certain extent a servant of the people. Touching 
nearly every interest in the community, it has no right to 
create extortionate rates to the interference of that busi- 
ness. But the advisability of establishing such a rate is 



ECONOMICS. 417 

doubtful. If fixed too liigb, then, as in the case of Eng- 
land, it becomes inoperative. If fixed too low, then it 
can be shown in the courts that it amounts to a confiscation 
of property, and becomes again inoperative. But a legisla- 
ture might in one year fix a maximum rate which would 
yield a satisfactory income to the railroads, while in the 
following year, owing to a depression in business, it would 
be too low. The railroads, taking redress in the courts, 
would have the law declared unconstitutional. The prac- 
tice of charging "all the traffic will bear" is a good one 
if honestly administered by the railroads. It is often true 
that railroads, with all their sharpness of business, are 
not keen in discovering their ultimate interests, in their 
anxiety to subserve immediate interests. A railroad that 
defrauds the people tends ultimately to destroy property 
and business and to injure its own prosperity. On the 
other hand, the people who seek to oppress the railroads, 
because, as they say, they are soulless corporations, may so 
cripple the railroads that it would cripple the business 
of the country, lower the assessed valuation of railroads, 
and throw the burden of taxation upon the people. Thus 
we return to the proposition that their interests are com- 
mon, and that there must be wise legislation, if any at all, 
if the interests of the people would be subserved. 

Railroad Commissions. 
The modern system of management of railroads in the 
United States is that of commissions. These commissions 
have been established in over one-half of the States in 
the Union. There are two grades of commissions: those 
with power to act, and those with only advisory powers. 
-27 



418 



ECONOMICS. 



These two types of commissions have been copied through- 
out the United States by various States. Kansas, in a 
recent law, created a Court of Visitation with power to 
act. This brought every question in controversy at once 
into the courts; but in seeking to give power to the com- 
mission, it created an independent court, and therefore was 
declared unconstitutional. 

The Interstate Commerce Commission of the United 
States has done a vast deal to unify the system of railroad 
traffic throughout the United States and establish a uni- 
form system of bookkeeping and reports. Thirty years 
ago there was scarcely a publication of any value on rail- 
roads in the United States; now there are very many 
publications, both reports and well-written treatises on 
railroads. This has brought the people to an understand- 
ing, in part, of the railroads, and has established to a 
certain extent the idea that the railroads are responsible 
to the public for their actions. 

Abuses of Monopoly Profits. 

Eailroads are frequently shortsighted enough to forget 
the principles of monopoly profits. Wherever they can 
extend the traffic to such an extent as to get a larger net 
return with a reduction of prices, they should do so. A 
very good illustration of this occurred some years ago in 
Austria-Hungary, where by a system of zone tariffs the 
tariffs were reduced from 20 to 80 per cent. The result 
was a vast increase of the traffic, and the railroads made 
more out of the increase than they had made before. But 
in this case the fares before reduction were so high as 
almost to prohibit traffic. Wherever there is sufficient 



ECONOMICS. 419 

population, a reduction in rates will almost always increase 
revenue sufficiently to meet extra expenses ; and to double 
the traffic does not anywhere nearly double the expense. 
The railroads that seek to make a return in services to the 
public by putting expenses down will gain more rapidly 
than the railroad that seeks to make a large gain by 
putting prices up. The railroads that realize that they 
are public servants, and seek to serve well, will in the long 
run, with a rationally conducted business, reap the largest 
reward. 

References: Hadley, A. T., The Railroad Problem; Stickney, 
A. B., Railroad Problem; Dabney, W. B., Public Regulation of 
Railways; Dixon, F. H., State Railway Control; Meyer, B. H., Rail- 
way Legislation in the United States; Meyer, H. R., Government 
Regulation of Railway Rates. 



420 ECONOMICS. 



CHAPTER X. 

THE COMMERCE OF NATIONS. 

The Advantages of Commerce. 

The gain resulting from trade between nations is of 
the same nature as that between individuals : it is relative 
rather than absolute. The exchange of the "relatively 
superfluous for the relatively necessary " brings an advan- 
tage to both parties making the exchange, although the 
advantages accruing to each may not be equal, because 
of the unequal skill of traders. However, among civil- 
ized nations where there is free competition and cheap 
transportation, the advantages accruing to different na- 
tions trading, in the long run, balance each other. Yet 
there are instances of unequal gains between isolated 
communities. Thus, the fur traders of America fre- 
quently obtained furs from Indians by exchanging arti- 
cles worth one-tenth of their value. The desire of the 
Indian may have been satisfied with what he obtained ; 
but it still remains true that in this sharp bargaining the 
person who obtained the valuable articles became rich 
clear beyond the condition of the Indian with whom he 
traded. The same principle is observed among the an- 
cient civilized nations in their trade with isolated com- 
munities of less culture and advancement. In such 
instances immense wealth was gained by the skillful 
trader. Even in modern times the ships that brought 
goods to California and other isolated ports of the New 



ECONOMICS. 421 

World charged fabulous prices for their goods. While 
they may have satisfied the desires of the people, they 
accumulated wealth at the expense of the necessities or 
fancies of those with whom they traded. 

In recent trade among modern nations the same princi- 
ple is to be observed. While the advantages will balance 
each other if conditions are equalized, one nation may 
have the advantage of another in the large amount of 
raw material at hand or in its cheap processes of manu- 
facture ; also, it may have a superior advantage in rightly 
adjusted protective tariffs and skill in competing in the 
market. Again, it may have a large advantage if it has 
nearly all the carrying trade, as in the case of England 
in comparison with the United States. In all legitimate 
processes of commerce all persons engaged in it should 
be benefited, and in the long run all of these benefits will 
tend to be equalized.* 

Trade Among Primitive Peoples. 

Commerce in its formal meaning could not be said to 
have existed among the natural races nor, indeed, among 
those of barbarous character. Among these people each 
tribe was self-sufficient ; it produced what it consumed. 
Many of the tribes engaged in barter of certain articles 
and in war plundered the goods of one another, but it 
was not until the division of labor and the development 
of systematic manufacturing that anything worthy the 
name of commerce existed. At first this trade of primi- 
tive peoples was merely incidental to their meeting, but 
subsequently traders sprang up who went from tribe to 
tribe carrying various wares. Intertribal trade was, at 

♦ See Chapter VI., Book III., Economics, 



422 ECONOMICS. 

first, a rude species of barter, in which the value of the 
article had but little weight. It was a method of " swap- 
ping " to promote good will or to please the fancy. Sub- 
sequently it became a method of satisfying the needs of 
the tribes, which could not be done with home produc- 
tion. Among the primitive tribes of America, Indian 
traders existed who carried trinkets and ornaments from 
tribe to tribe. In India, where all ancient customs seem 
to have crystallized, the single trader continued down to 
recent times. Among barbarous peoples, trade was car- 
ried on overland with great caravans. 

Commerce of Ancient Nations. 
After national life had been well begun, a system of 
commerce between ancient nations sprang up, and the 
earliest records of China, India, Russia, Assyria, Ethiopia, 
and Phoenicia are of wealthy nations engaged in exten- 
sive commerce. This brought into existence a distinct 
class of merchants, or traders. The methods of trans- 
portation of ancient nations varied according to their 
geographical conditions and the degree of their economic 
development. First, there were the great caravans of the 
desert, in which the carrying power was the camel or, as 
in India, the elephant. In western Asia the caravans 
were chiefly conducted by Arab traders, which traveled 
overland between the great cities of Egypt, Assyria, Per- 
sia, and Palestine. Subsequently river traffic developed, 
but it was national rather than international commerce. 
The Ganges and the Indus, the Tigris and the Euphrates, 
the Nile, and in modern times the Danube, the Elbe, and 
the Po were means of traffic between different cities and 
countries. Later, as boatmen became more venturesome, 



ECONOMICS. 423 

the inland seas became highways of commerce, and early- 
traders ventured on the Persian Gulf, the Black, Medi- 
terranean, Caspian, and ^gean seas. 

The Phoenicians were Mastera of Commerce. 
The only people of antiquity that could aspire to claims 
of commercial greatness were the Phoenicians, who were 
the first to become really masters of traffic on inland 
seas. The great and wealthy cities of Tyre and Sidon, 
situated on the east shore of the Mediterranean Sea, be- 
came the centers of an extensive commerce. From these 
points the Phoenicians trafficked with Egypt, Assyria, 
India, and subsequently with Greece, Rome, Spain, and 
Britain, and became familiar with all the coasts and ports 
of the Mediterranean. Abandoning the prevalent system 
of obtaining wealth by conquest and plunder, these people 
gained their wealth and independence through industry 
and commerce. The secret of their power seems to have 
been an inordinate desire for gain, skill in ship-building, 
the manufacture of certain articles not found in other 
nations, and the adventurous disposition of their seamen. 
The advantage of having the carrying trade for the world 
was a source of enormous wealth, and the cities became 
rich and populous. For the five or six hundred years 
that the Phoenicians ruled the seas, they planted colonies 
in Greece, Italy, northern Africa, Spain, and Asia Minor. 
The most important of these colonies was that of Car- 
thage, built and planned after the city of Tyre. The 
Carthaginians continued to develop wealth by trade in 
the same manner as the parent colony. They developed 
sufficient strength to again and again cope with the 
Roman nation, but were finally overthrown. During the 



424 ECONOMICS. 

period of Phoenician supremacy, the Greeks developed a 
limited commerce, although her states, cities, and colonies 
were largely self-sufficient. Rome was not a commercial 
nation, for primarily her wealth came from agriculture, 
and when she became strong enough to gain her wealth 
by trade, she obtained it by conquest and plunder instead. 
Yet many ships laden with foreign goods came up the Po 
and the Tiber and visited the seaport towns. 
Mediaeval Commerce. 

The great commercial period which lies between the 
fall of the Roman Empire, 476 a.d., and the discovery 
of America by Columbus is marked by three important 
developments : namely, Byzantine commerce, the rise of 
the Italian cities, and the organization of the Hanseatic 
League. After Constantine established the seat of the 
empire at Byzantium, this city gradually grew into a 
center of Oriental trade. For a thousand years the strait 
of Bosporus was the gateway of trade between the East 
and the West; for a thousand years the trade of the 
Mediterranean Sea and the caravan routes was focused 
at Byzantium or Constantinople. During the Dark Ages 
the city of Constantinople fostered what little commerce 
existed in the East, while in the west of Europe the 
monasteries and princes encouraged and controlled trade. 

It was an age of national distrust and national hostili- 
ties, but a passive trade was carried on between various 
nations, generally conducted by foreign traders. Charle- 
magne, by extending the boundaries of his territory, made 
it possible to encourage traffic in foreign goods. The 
Arab Moors at first greatly opposed traffic with the 
Orient, but subsequently encouraged it, but it remained 



ECONOMICS. 425 

for the Crusades to acquaint the East with the West 
and open once more the trade of nations. 

The commerce of the Middle Ages reached its highest 
development through the Italian cities. The cities of 
Amalfi, Genoa, Pisa, Venice, and Florence, in southern 
Europe, were ready to take advantage of trade relations 
that sprung up between the East and the West ; indeed, 
they began their great career by transporting the troops 
and goods of the Crusaders to Palestine. From this time 
on, the cities grew in wealth, Venice being the leader of 
all in trade. The Venetians had been natural sailors for 
five hundred years prior to the Crusades, hence they were 
more ready than any other national group to take advan- 
tage of maritime trade. It is estimated that in the four- 
teenth century Venice had three thousand merchant ships, 
manned by twenty-five thousand seamen. The Venetians 
began their commercial career by supplying fish and salt 
to the world, in exchange for which they obtained food, 
clothing, and timber for their galleys; but their chief 
wealth arose from trade with the Orient. They brought 
the rich silks and manufactured articles of the Orient and 
exchanged them with products of western and northern 
Europe. The merchants of Venice thus had the advan- 
tage of an immense traffic, as the Venetians were their 
own carriers as well as the commercial carriers of other 
nations. As a consequence, wealth developed rapidly. 
Indeed, the history of the world shows that the nation 
which becomes preeminent in commerce usually develops 
its carrying trade along with it, and that the nation that 
obtains the supremacy of the carrying trade is very apt 
to obtain the commercial supremacy of the world. 



426 ECONOMICS. 

In conjunction with the trade of the Italian cities we 
have the organization of the Hanseatic League in the 
north of Europe. Independent cities entered into a 
league to protect their trade from pirates and to facili- 
tate the exchange of goods. The number of these cities 
finally reached eighty -five, of which Hamburg, Liibeck, 
Bremen, and Cologne were among the important ones. 
These cities were connected by inland trade with Italian 
cities, and while the cities of the League grew rapidly 
in wealth, their prosperity only added to the increase of 
wealth of the Italian cities, which were gateways to the 
Oriental trade. 

The Hanseatic League established rules for the regula- 
tion of trade and developed commerce to a great extent. 
Primarily established to prevent piracy, to prevent the 
extortion of lords, and to stimulate production and trade, 
the League laid the foundation of mercantile law and 
began the policy of reciprocity and freedom. For four 
hundred years it was prominent in the control of com- 
merce, and during this time practically monopolized the 
commerce of northern Europe. It maintained armies 
and navies and carried on war against kings. But its 
arbitrary power finally became intolerable and its exist- 
ence a menace to trade. It began to decline in the latter 
part of the fourteenth century, and by the end of the fif- 
teenth century it had lost its power. The decline of 
feudalism and the rise of national life, coupled with the 
determination of each nation to control its own com- 
merce, and the competition aroused by a developing 
trade, swept away all concessions and left the League 
helpless. 



ECONOMICS. 427 

Nature of Mediaeval Commerce. 

The traders of the Middle Ages to a great extent dis- 
posed of their goods through markets and fairs which 
were established on certain days of the week. These 
originated from the fact that it would be advertised that 
a certain caravan or ship laden with goods would appear 
at a certain time, and in order to obtain the goods the 
people came from all parts of the country. As the cities 
developed, these became regular markets. Finally the 
traders who attended to the sale of these goods estab- 
lished regular shops to take care of the surplus goods. 
As trade became more extended and regular, these shops 
became continuous and the transporters delivered their 
goods to the shops. Gradually the shopkeepers became 
regular importers of goods. From that time on the lines 
were gradually drawn between the wholesale merchant, 
importer or jobber, and the retail merchants. The com- 
petition in trade led to various restrictions among the 
cities and towns engaged in trading, and had a tendency 
to create certain privileges and monopolies. There was 
much jealousy among the towns, especially among the 
Italian towns, and much rivalry, which caused bitter 
feeling. Their salvation, however, lay in the fact that 
they developed manufactures very rapidly. While the 
nations or countries that have the carrying trade of 
commerce have tremendous advantages, no nation has 
ever built up an extended commerce without having a 
large amount of raw materials or manufactured products 
to export to other nations. 

The gild merchant, a mediaeval institution for the 
control of trade, was a protective association which 



428 ECONOMICS. 

included all those who were engaged in buying and selling 
goods within a given town. Only those who were mem- 
bers of the gild had the privilege of trade. In this way 
local merchants protected themselves against traders of 
other towns and foreign traders as well. Following this 
protective idea, there came in vogue a body of laws and 
regulations of trade known as the "lavr merchant." Mer- 
chants made their own rules controlling trade, to suit 
their own needs. The " gild merchant " was represented 
in several types. Besides the gild type, the law of the 
municipality, the central national law, and the law of vol- 
untary, arbitrary bodies included the chief sources of the 
gild merchant. It laid the foundation of mercantile law. 

In England the local gild merchant became prominent 
at an early period, but subsequently the foreign trade of 
England fell into the hands of foreigners. Real English 
commerce began at the appearance of the English traders 
or "merchants adventurers," as they were called, who 
began to compete for the carrying trade. Originally 
the term was applied to merchants who undertook to 
export goods to new or unrecognized markets, or to mer- 
chants of various towns who were organized for their 
own protection. Finally the company of " Merchants 
Adventurers " was incorporated, which became a power- 
ful and wealthy association. In 1564 they received a 
royal charter from Henry VII,, under the title of " The 
Merchants Adventurers of England." This gave a great 
impetus to an independent national commerce. 
Modern Commerce. 

Mediaeval commerce resembled the ancient commerce 
in the concentration of trade in towns and cities. The 



ECONOMICS. 429 

chief difference existed in the more widely extended area 
over which it operated, having longer routes of travel 
and a larger number of stations. It also differed in the 
larger number of articles for exchange, arising chiefly on 
account of the development of manufactures and the in- 
creased interchange of goods. Modern commerce, which 
may be said to date from 1492, is marked by oceanic 
transportation. It was the era of discovery and coloniza- 
tion. First, the invention of the mariner's compass gave 
an impetus to sea travel. The use of gunpowder brought 
new means of defense to commerce. The discovery of 
America opened up new inducements to oceanic travel, 
and the discovery of a route around the southern part 
of Africa to the East Indies and another route around 
the southern part of South America to the Philippine 
Islands, opened up great ocean highways of travel. This 
occurred at the period of the rise of modern nations. 
Portugal, Spain, The Netherlands, England, and France 
began to compete for the commerce of the world. 
The Mercantile System. 
During the period of the rise of national commerce 
there came into existence a system of trade so important 
as to mark an epoch of history. It has been known as 
the Mercantile System, and represents a doctrine of trade 
which has its advocates in modern times. Mercantilism 
was a distinct step in the evolution of commerce just as 
monarchy was in the evolution of government. In the 
fifteenth century there was great confusion of trade, 
caused by the local jealousies and rivalries among the 
local and foreign merchants, the Merchants Adventurers, 
and the Hanse Merchants. A movement was started 



430 ECONOMICS. 

which had a double purpose, to bring about unity in 
domestic affairs and to develop national defense in trade. 
It was the monarchical principle applied to commercial 
affairs. It was a process of " state-making and national 
economy-making at the same time." * Mercantilism rep- 
resents the transformation and reorganization of indus- 
trial society as well as the rise of national commerce. It 
not only transformed and united the municipal, industrial, 
and commercial interests, but set up barriers of trade 
against the encroachments of other nations. To subject 
local interests to national interests, and to advance the 
latter beyond the interests of other nations, were the 
prime motives of the mercantilist doctrine. In the sub- 
sequent development of mercantilism it stood for govern- 
ment restrictions on commerce and trade. Restrictions 
on imports or exports, limitation of the carrying trade 
to national ships, the tariff on exports and imports, and 
the attempt to make a favorable balance of trade so as to 
leave gold and silver in a given country, were some of 
the cardinal points in its later history. While defective 
in many of its general tenets, mercantilism was service- 
able in building national life and national commerce. Its 
policy, especially in England and France, had a tre- 
mendous power in establishing national supremacy. It 
subsequently affected The Netherlands, and later, Italy 
and Germany. In the nineteenth century there was a 
great reaction from the policy, especially in England; 
but in more recent times it has revived, so that each 
nation seeks to protect its foreign commerce either by 
tariff, subsidy, or reciprocity treaty. 

* Schmoller, The Mercantile System. 



ECONOMICS. 431 

National Competition. 

Portugal at first became prominent and obtained a 
monopoly of the East India trade, especially in the trade 
in spices, but war with Spain furnished an opportunity 
for the Dutch, which they readily seized. The early mari- 
time enterprise of Portugal, stimulated by the genius and 
daring of Prince Henry the Navigator, led to discoveries 
and an extended commerce. The result was the com- 
mercial supremacy of Portugal in India and China and 
the competition with the Dutch in trade. At the open- 
ing of the modern period (1495-1521) Lisbon was the 
chief emporium for the distribution of Oriental goods, 
and Portugal reached her zenith of commercial power. 
The decline of her prestige in the East was followed by 
her forced union with Spain. After her freedom was ob- 
tained (1640), war with The Netherlands further weak- 
ened her power; but a commercial treaty with England 
resulted in the transference of her trade from the Dutch 
to the English and strengthened the already powerful 
nation. Spain had a tremendous trade in the Western 
Hemisphere on account of her colonization and produc- 
tion of the precious metals. This gave her great pres- 
tige in the commercial world, but her policy eventually 
caused her ruin. She failed to develop home manufac- 
tures, and the silver obtained from America passed out of 
Spain into France and The Netherlands to pay for the 
manufactured articles used by Spain in home consumption 
and foreign trade. 

The rise of the Dutch, whose central cities were Ant- 
werp and Amsterdam, shifted the monopoly of trade to 
The Netherlands. They soon secured the monopoly of 



432 ECONOMICS. 

the East India trade from Portugal. The Dutch were 
thrifty people who understood the art of commerce. At 
home they not only developed manufactures, but estab- 
lished a system of banking and finance which was of 
great service on their own account and also on account 
of the commerce of the world. The Dutch had a strong 
mercantile policy which established great fleets for carry- 
ing on commerce, for they made commerce an end in 
itself ; but their commercial development had extended 
beyond their national and political life, and therefore 
they were not able to hold their own in the competition 
of nations for trade. Subsequently they lost this trade 
in the development of the East and West India Com- 
panies, which came into competition with them and 
obtained a monopoly of the trade. 

The French and the English. 
Down to the time of Henry VIII. the Lombard, Dutch, 
and Hanse merchants monopolized the most profitable 
branches of trade. In England, shipping was almost 
wholly in foreign hands, but the Tudor kings had a 
special object in exalting wealth and the maritime power 
of England. A feeling of resentment continued to grow 
against foreign merchants until it was expressed against 
the Hanseatic League, whose factory at the Steel Yard 
operated independent of the laws and social order of 
England. It was in the reign of Edward VI., in 1552, 
that the shackles of British trade were broken by placing 
the Hanse factory on the same basis as other merchants 
so far as commerce duties were concerned. Subsequently, 
in the time of Elizabeth, the Steel Yard factory was closed. 
From this time on British trade was promoted by every 



ECONOMICS. 433 

effort of government. The explorations and discoveries 
by the English during the sixteenth century widely ex- 
tended commerce. Companies were formed for trade, 
including the East India Companies and the company of 
Merchants Adventurers. They controlled a large portion 
of the export trade, but the whole development of manu- 
factures and trade were under a system of monopolies. 
These monopolies eventually became oppressive. 

But Cromwell, by the celebrated act of 1651, suppressed 
private monopoly and made a gigantic monopoly of the 
British government. The law forbade the carrying of 
goods to or from England or her colonies in any except 
British vessels. As a result, ship-building sprang up, 
and subsequently a tremendous trade was developed ; but 
more than all, the great work of English development 
during the Tudor period was made secure by this act. 
In France the same system of restriction was instituted 
under Colbert, for mercantilism had culminated in France 
more than in any other country. The idea prevailed 
that a country grew rich only through its trade balance, 
and every effort was made to secure the favorable balance 
of trade through the restriction of exports and imports. 
But England had become mistress of the seas because of 
her immense carrying trade and the consequent develop- 
ment of her manufactures and agricultural products.* 
Recent Commerce. 

The main courses of English trade continued to en- 
large down to the end of the Napoleonic wars in 1815, 
but a new era of commercial development seemed to dat6 
from this event. Industrial revolution, brought about 

* See p. 366, Economics. 

— 28 



434 ECONOMICS. 

by the introduction of power manufacture, changed the 
course of commerce by the introduction of machinery in 
the making of cotton and woolen goods, the building of 
ship canals, the division of labor, and the development of 
the factory system. The use of steam and water power, 
and the quickening of manufactures and of domestic 
commerce gave a great impetus to foreign trade in Eng- 
land, and her commerce continued to extend. The intro- 
duction of the laissez-faire doctrine through the teachings 
of the early economists advocated the removal of restric- 
tions on trade. The Physiocratic doctrine in France had 
a similar influence in that country. But nations that 
had gained such prestige under restrictive measures were 
able to advance without government aid. The commer- 
cial supremacy of England continued on account of her 
large manufacturing interests and her immense carrying 
trade on the ocean. This was aided by the repeal of the 
Corn Laws and the development of free trade. By these 
measures England had a cheaper food with which to feed 
her army of workers. Having built up her commerce, 
having become mistress of the seas, having developed a 
foundation for manufactures, England entered upon free 
trade at the opportune moment. Her commerce and 
trade went forward with a bound. 

American Carrying Trade. 
In the nineteenth century, America became England's 
great competitor in the carrying trade. Down to 1857 
the carrying trade of the United States increased rapidly ; 
since that time it has relatively declined. This can be 
attributed to several causes : first, the Civil War, which 
absorbed all the energies of the United States for several 



ECONOMICS. 



435 



years, had a tendency to destroy merchant marine rather 
than develop it. England also had an advantage, since 
1860, in the construction of steel vessels. The tariff has 
prevented a development of American shipping, and the 
immense internal improvement of the United States has 
absorbed capital that otherwise might have gone into 
the international commerce. The accompanying table 
shows the relative decline of the carrying trade. 

THE VALUE OF UNITED STATES IMPORTS AND EXPORTS AND THE 
PERCENTAGE CARRIED IN AMERICAN VESSELS. 





Exports and ImporU 


Per Cent. 


1857 


$ 723,850,823 

762,288,550 

991,896,899 

1,503,593,404 

1,647,139,093 

2,089,528,616 


70.5 


1860 


66.5 


1870 


35.6 


1880 


17.42 


1890 


12.85 


1900 .... 


9.3 







Yet, during this period, the United States has become 
the greatest export nation in the world. Her enormous 
supply of raw material, agricultural products, and the 
recent development of manufactures under the adminis- 
tration of a protective tariff have advanced her foreign 
trade. The following table gives the exports of the four 
chief industries and shows the rapid development of 
export trade in recent years. 

PRINCIPAL EXPORTS FROM THE UNITED STATES. 





1898 


1899 


1900 


1905 


Cotton 

Bread stuffs . . . 

Provisions 

(Including meat 
and dairy prod- 
ucts) 

Iron, steel, and 
manufactures. 


$247,977,311 
333,987,119 
167,340,960 

70,441,109 


$233,656,490 
273,999,699 
175,508,608 

93,782,431 


$266,922,065 
262,744,078 
184,453,055 

121,992,590 


$379,965,014 
107,732,916 
169,965,873 

134,728,363 



436 ECONOMICS. 

Development of American Commerce. 

Having recovered from the Civil War, the internal com- 
merce of the United States began to expand and subse- 
quently her international trade. Since 1885, she has 
become a formidable competitor of France, England, 
and Germany in the world's markets. She has become 
the greatest manufacturing nation in the world, as well 
as the greatest export nation. In 1905 the value of her 
manufactures was about fifteen thousand millions, or 
greater than the estimated manufactures of the United 
Kingdom, Germany, and France. The total value of 
manufactures entering the world's market is estimated 
at four thousand million ; of this the United States sup- 
plies but five hundred million, or 12|^ per cent. It indi- 
cates that there is a vast opportunity for the United 
States to develop the exportation of manufactured goods. 
But the discrepancy between the amount of the product 
and the international trade is not necessarily indicative 
of an impoverished condition of the United States; in- 
deed, it represents just the opposite. The rapid devel- 
opment of the United States has enabled her to absorb 
over twelve thousand five hundred millions of her own 
manufactures and to export less than five hundred mil- 
lions. This is evidence of tremendous wealth and pros- 
perity ; also, it is evidence of the principle that domestic 
commerce is of far greater importance to the nation than 
foreign commerce, and that periods of prosperity of the 
nation cannot be estimated by the amount of its foreign 
trade. Nevertheless, America is to-day in sharp competi- 
tion with England, France, and Germany for the markets 
of the Old World and for the newer markets of Africa, 
South America, and the Orient. 



ECONOMICS. 



437 



EXPORTS OF THE UNITED STATES BY SOURCES OF PRODUCTION. 



Percentage 

Agriculture 

Domestic manufacture 

Raw products (miscel.) .... 

Fisheries 

Forests 

JMining 



190h 



81.13 


59.48 


12.76 


31.52 


1.41 


.40 


1.31 


.60 


3.26 


4.80 


.13 


3.20 



100.00 



100.00 



Causes of Commercial Success. 

The commercial success of a nation depends primarily 
upon the amount of raw materials and manufactured arti- 
cles that it has to export after the home consumption has 
been abundantly supplied ; upon transportation by land 
and water from the interior to the seaboard ; a cheap 
and bountiful food supply for a thrifty and vigorous 
labor population ; the development of the merchant ma- 
rine, and the successful choice of trade routes whereby 
vessels may be laden with marketable goods for the 
return voyage. Moreover, it is necessary in modern 
times that merchants promote and advertise their inter- 
ests in the countries in which they are seeking market. 
The question, too, of the good will of nations is very im- 
portant, and commercial treaties which promote favorable 
terms of trade are exceedingly valuable. The tariff may 
be a detriment to foreign trade, but it may also be used at 
times, like other restrictive measures, to temporarily pro- 
mote the welfare of a nation. However, to the nation 
that has large resources of raw material and abundant 
food supply, first-class labor power, abundant opportuni- 
ties for steam, water, and electric power, free international 



438 ECONOMICS. 

trade would be a great advantage in the long run. Some 
nations have advanced their carrying trade by giving sub- 
sidies to the ship companies. This may develop for a 
time the number of the ships owned by the exporting 
nation giving the subsidy, but in the long run it is detri- 
mental to national welfare and development. * 
Principles of International Trade. 
Commerce is an instrument by which commodities are 
placed in the hands of consumers, and that system of 
commerce which will do this the most effectually and at 
the least cost is of greatest benefit to the consumer. In 
the thrifty nation, domestic commerce is of far greater 
importance than international. In modern times, through 
universality of invention, through steam and electricity 
applied to machinery, each nation becomes more and more 
self-sufficient and independent in the supply of manu- 
factured goods. The agricultural product is limited by 
the soil and climate, and a nation must import what it 
cannot raise. The exportation of the surplus goods of a 
nation has a great influence on its prosperity, but the 
power to consume all of its raw materials and manufac- 
tured products may be evidence of greater financial 
prosperity, for it is only a small number of workers of 
any nation who are putting labor power into products 
for international trade. It is estimated that between 
one-fifth and one-sixth of the wage-earners of Great 
Britain are putting labor power into goods for exporta- 
tion to foreign markets. Sooner or later, as all foreign 
trade must balance, the imports and exports of all the na- 
tions combined must be the same. There is a theory that 

^* See Chapter III., Book IV. 



ECONOMICS. 439 

the wealth of a nation is made by its trade balance and that 
the extent to which exports exceed imports is evidence 
of national prosperity and power. But this is a false 
assumption, for if a nation imports goods, it is an evi- 
dence that it has means to pay for them and also assumes 
that there is some advantage to be gained in the importa- 
tion of these goods.* In other words, the nation that 
purchases abroad has added to its own stock of wealth ; 
on the other hand, it may be selling goods that might be 
consumed at home but are put upon the market to satisfy 
some more urgent demand of indebtedness. Yet, in the 
long run, a nation could not continue to import goods 
without loss unless it should be followed by a period of 
export trade. However, international trade may bene- 
fit all nations engaged in it just as domestic trade 
may benefit all individuals engaged in it. The gains, 
however, in international trade, are of the same nature 
as the gains of domestic trade, that is, they are merely 
relative. 

References: Adams, C. C, Commercial Geography; Lynd, L. W., 
Commercial Geography ; Price, L. L., English Commercial Industry ; 
Trotter, Spencer, The Geography of Commerce; United States 
Statistical Abstract ; Yeats, John, The Growth and Vicissitudes of 
Commerce. 

* See Chapter VI., Book III. 



BOOK IV. 

PUBLIC ECONOMICS. 



(441) 



CHAPTEE I. 

RESTKICTIVE MEASUEES. 

Free Trade and Free Competition. 
As has been previously stated, the laws of pure eco- 
nomics are based upon the condition of free trade and 
free competition. That is, if laws act with precision the 
condition of free trade and free competition must be ful- 
filled without hindrance. There must be no monopoly 
to prevent the competition, or other hindering restrictions 
on trade. All philosophical discussions of political econ- 
omy recognize these principles. That these conditions are 
the best for economic society is not necessarily true. 

Mercantilists. 
The first great group of economists were the Mercan- 
tilists, who advocated among other things restrictive meas- 
ures, in trade. They held that all gains in a nation arose 
from trade, and that certain laws should be established for 
keeping money in the country and preventing its going out, 
as the amount of money was an indication of the amount 
of wealth of a community. This principle extends re- 
strictive measures in trade and attempts to control certain 
industries. The advocacy of restriction was carried to 
such an extent as almost to exclude the consideration of 
freedom of trade and industry. 

Physiocrats. 

There followed a group of people who advocated among 
other things the principle that all values arise ultimately 

(443) 



444 ECONOMICS. 

from the soil, and they sought to promote agriculture and 
industry, and to place little value upon trade as a means 
of developing wealth. They advocated also the freedom of 
trade, and that all restrictions should be taken from it. 
This led later to the development of the laissez-faire doc- 
trine. 

Adam Smith followed, with his Wealth of l^ations, 
which really established the principle of freedom of 
trade. The nations, having tried, restriction, found it 
to be a detriment, and to so greatly interfere with trade 
as to retard their growth, and finally reacted in 
favor of non-interference and free trade. The philoso- 
phers held that all interference of the government was a 
detriment to the progress of nations; that if they would 
let things alone the laws of trade would be established 
according to justice and the best interests of the commu- 
nity; that each individual seeking his own interest would 
seek the interest of the community at large. This theory 
prevailed to a large extent, and the world felt the influence 
of it for many years; but it finally awoke to the idea 
that no one formula or theory could at all times govern the 
actions of nations in relation to trade, and that, as political 
laws were made to establish and insure freedom, it was 
necessary, in order to secure freedom and justice in the 
commercial world, to establish certain regulations; and 
so the modern world has reacted from this position of 
laissez-faire. Perhaps the growth of monopolies, which 
has tended at all times to break down free competition 
and free trade, has promoted the interference of nations in 
regard to the regulation of trade and industry. 



ECONOMICS. 445 

Modem Restrictions Upon Industry and Trade. 
A large number of laws liave been passed restricting 
industry and trade; protective tariffs indulged in to a 
greater or less extent by all nations; laws regulating and 
limiting the power of corporations; laws regulating the 
limits of certain industries, — all show the development of 
a tendency toward restrictive measures. 

Legislation in Favor of Labor. 

We find also a large number of laws made for the insur- 
ance of the rights of labor; laws controlling the building 
of factories, for the protection of life and limb, sanita- 
tion and safety of the laborers, — all showing that the gov- 
ernment has its interest in all classes of people. A large 
number of labor commissions in the States of the Union 
and in various foreign countries which inquire into the 
condition of labor and recommend certain laws concern- 
ing its protection and control, show the tendency of re- 
strictive measures in this line. 

Legfislation in Favor of Commerce. 
Much legislation has been done to develop commerce. 
The carrying trade of different nations has been encouraged 
by laws and subsidies. Also, the extension of railroads 
has been encouraged by means of land grants and subsi- 
dies ; nations have given encouragement to commerce and 
commercial enterprises by the development of canals and 
water-ways. There are many other means for the encour- 
agement of commerce. The Interstate Commerce Com- 
mission, established by the United States Government to 
inquire into the conditions of railroads and commerce in 
general in the United States and for their restriction and 



446 ECONOMICS. 

regulation, and the various state commissions, all have a 
tendency to place transportation within proper bounds. 

Legislation Regulating Industry. 
Considerable legislation has taken place in recent years 
to -encourage the development of the resources of the 
country. At one time a bounty was given for the produc- 
tion of beet and cane sugar, which had a tendency to 
develop that industry for a time. Had it continued, the 
United States would soon have had sufficient sugar manu- 
factories to supply its own needs. Whether this would 
have been a wise movement or not would have depended 
upon the effect in increased taxation and the effect upon 
other industries and trade. Bounties have been given for 
the planting of forest trees in semi-arid districts. The 
protective tariff is urged as a means of developing home 
industries. 

Oovernment Bestriction of Monopolies. 

The prohibition of the manufacture of certain articles 
has been declared in various instances. A law against the 
manufacture and sale of intoxicating drinks is among the 
most important. Other industries are purposely burdened 
by a process of taxation, such as liquors, tobacco, oleomar- 
garine, etc. These taxes are laid with a view to the partial 
suppression of the traffic. While at times they have more 
or less influence, upon the whole they are ineffective as 
prohibitive measures. 

Plane of Competition. 

There is a great discussion and a wide difference of 
opinion as to the extent to which the government should 



ECONOMICS. , 447 

go in the control of industries. The fundamental principle 
lying at the base of all this may be stated : That the gov- 
ernment should regulate all competition. It should set 
a limit beyond which competition should not go ; it should 
also aid and assist certain industries if possible by general 
legislation, without special favoritism and without detri- 
ment to other industries. 

Government Should Realize to the People the Benefits of 
Monopoly. 

Having determined the plane of competition so that 
there is freedom and justice within certain limits, the gov- 
ernment should go a step farther, and realize to the peo- 
ple the benefits of a monopoly which exists from the 
nature of things. There is no reason why the government 
should allow the development of a certain phase of in- 
dustrial life which shall overshadow and overbear the ef- 
forts of a large portion of our citizens in industrial life, 
any more than it should allow the growth of a certain phase 
of political life which shall overshadow and overbear a 
large number of citizens, oppressing them and preventing 
them from having the freedom and rights of political life. 
Therefore, wherever this monopolistic power becomes op- 
pressive and unjust and un-American, it should be regu- 
lated by the government. Take the case of the street- 
railway corporations and the gas companies. Franchises 
are granted to a few persons in the name of a corporation 
for the purpose of serving the public. The people own the 
streets through which these persons operate, and by their 
vote exclude all but a few individuals from carrying on 
the special business. It is right that the people should 



4:4iS ECONOMICS. 

have a rental for the use of the streets by private parties 
to the exchision of all others; it is absurd not to charge 
the rental. Hence, in the form of a franchise tax or 
cheaper rates, or both, or in the form of municipal owner- 
ship, the government must realize to the people the benefits 
of the monopoly arising on account of rental of streets 
and public property. 

References : Ely, Monopolies and Trusts ; Bemis, Municipal Mo- 
nopolies; Ripley, VV. Z., Pools, Trusts, and Corporations; Jenks, J. W., 
The Trust Problem ; Bolen, J. W., Plain Facts as to the Trusts and 
the Tariff. 



ECONOMICS. 



449 



CHAPTER II. 

PUBLIC CONTROL OF INDUSTRIES. 

General Management of Industries. 

There are several ways in which the state or government 
may deal with industries: First, it may let them en- 
tirely alone, leaving them to the laws of trade and competi- 
tion on the supposition that the largest justice will be 
meted out without any interference ; second, it may estab- 
lish such rules and regulations as would control them 
within particular limits; third, it may own and operate 
such industries as seem necessary for the benefit of the com- 
munity. Perhaps no one of these rules could be laid down 
as universally correct, for the government seeks under all 
circumstances to provide for the well-being of the com- 
munity at large, and may do anything that is possible or 
necessary for securing this well-being. The question to 
be considered is : What wiU produce that largest well-being 
at the least expense to the community? In other words, 
What is expedient to do under the circumstances ? rather 
than, What is theoretically just ? 

In many instances there are industries to be let alone 
entirely, with the exception of certain rules of justice ap- 
plying to the intercourse of individuals. Second, there are 
those industries which are better controlled with certain 
laws and regulations for the purpose of determining and 
securing justice for the people. In the third place. 



450 ECONOMICS. 

there are those industries that are difficult to regulate and 
which it would be an advantage to the people for the state 
to own and control, and under' such circumstances one must 
presume almost entirely upon proper administration of 
affairs in order to secure justice. 

Control by CommissionB. 

One of the most important of modern methods for the 
control of industry is represented in the growth of railroad 
commissions in the United States. These commissions 
vary in regard to their powers. Most of them are simply 
advisory and limited in their jurisdiction. Some of them 
have great power to act. The Interstate Commerce Com- 
mission has done a vast deal to regulate industry, notwith- 
standing the fact that its powers have been greatly cur- 
tailed by the courts, having established uniform systems 
of bookkeeping and uniform methods of reports. They 
have established that public carriers are public servants, 
and are amenable to the public for their wrong-doings; 
and have also done much toward establishing uniform rates 
and preventing extortion. The same may be said of nearly 
every railroad commission in the United States. These 
commissions gradually gain the confidence of the people 
and gain more power ; and while many people advocate the 
public ownership of the railroads as a public necessity, it 
appears that it will be determined in most instances that 
the increasing power of the commissions will eventually 
furnish them ample control and regulation. 

Government Ownership of Railroads. 

There are many who advocate the government ownership 
of railroads because they are said to be natural monopolies. 



ECONOMICS. 451 

At best, they can only be said to be partial monopolies; 
and a system of government o^^^lership, as established in 
different communities and states, has not proved entirely 
satisfactory. It would entail a vast debt on the United 
States to procure all the railroads, which are now capital- 
ized at over ten billions of dollars. It would involve the 
employment of a vast army of people, w^hich, if not put 
upon the civil-service rules, would be a dangerous political 
power. 

It would have some advantages in insuring a uniform 
system of rates and of traffic. It would prevent extortion 
and injustice, which sometimes prevail. It would prevent 
waste in some ways by the consolidation of different lines 
and the abolishment of parallel roads. It would prevent 
waste in the management, dispensing with numerous high- 
salaried officials. And yet, on the other hand, without wise 
management railroads might fail to yield a dividend suf- 
ficient to defray the interest on the payment of a necessary 
sinking fund for the reduction of the debt which must be 
assumed in the purchase of the roads. In comparing Eu- 
ropean management with American management, there is 
more progressive development in certain lines found in 
American railroads than in any others in the world. In- 
deed, Europeans are patterning after Americans with re- 
spect to equipment and comfort. It also seems proper that 
the United States should pattern after the European lines 
in perfection of road-bed and precautions for safety. But 
the advantage of government ownership in regard to all of 
these matters is not evident, for England has a better 
system than is found on the Continent, and still under pri- 



452 ECONOMICS. 

vate management. Many persons urging government con- 
trol of railroads in tlie United States have failed to observe 
the enormous mileage compared with that of some of the 
European nations. It will be observed that the conditions 
vary in different countries, and consequently the same rule 
will not apply to all. (See Table I.) 

Laws Controlling Corporations. 

But whatever takes place in regard to specific industries, 
the general laws controlling corporations need careful 
supervision and enlargement. There should be more spe- 
cific care in regard to such matters. It appears, then, 
that something should be done respecting corporation regu- 
lations. Restrictions should be placed upon methods of 
organization, the granting of franchises, and, in fact, laws 
made controlling and limiting the operation of corpora- 
tions. 

Municipal Ownership of Gas- and Water-Works. 

It would seem that in cities where water is furnished for 
the people at large, it should be done by the city itself 
rather than be left to private corporations. The water- 
supply is so essential to the sanitation, health and conveni- 
ence of all the people, it seems to be a very improper thing 
for a city to allow it to pass from under its control. What- 
ever is the expense, whether great or less under city control, 
there can be no question ' that every municipality should 
own and manage its water-works, regardless of inconveni- 
ence and expense. 

In regard to the gas-supply, it is a great question whether 
or not the city should own and operate its gas plant. There 
are several methods to be observed where the city owns its 



ECONOMICS. 453 

gas plant. In the first place, a normal price may be charged 
for the gas and the surplus turned into the public treasury 
to lighten taxation. In the second place, the gas may be 
furnished at a very low price, the city neither gaining nor 
losing by the operation. The third proposition is a com- 
bination of these two ideas, the gas being furnished to the 
people at something below the normal rate and still having 
a surplus for the treasury, — less than in the other case. 

As to the right of municipal ownership, there can be no 
question. The streets belong to the people at large, and no 
excessive monopoly should be given to any persons without 
adequate return. The city itself has a better right to use 
these streets to establish its own industries than has any 
private corporation or monopoly. There are many things 
pointing towards the expediency of the city ownership of 
gas. 

Oovernment Management versus Government Ownership. 
Those who advocate government ownership state that 
a revenue would be returned to the city which would bene- 
fit the community. Under wise management this may 
prove true ; but it sometimes happens that a deficit occurs 
in city administration, and this revenue is not obtained. 
There is always an attendant danger to business where 
politics prevails to a large extent. Until we reach a period 
where municipal government shall be conducted on a busi- 
ness basis, there can be no assurance that the gas-supply 
will yield a return to the city. It is urged also that politi- 
cal influence will be lessened by government owoiership. 
It is held that under private corporations corruption is 
developed and the city council is elected by corrupt 

—28 



454 ECONOMICS. 

methods, so that corporations have their own way; while 
under municipal ownership this would disappear, — the 
records would show whether business was properly man- 
aged and the funds properly used. However, unless the in- 
creased responsibility would bring a better class of citizens 
to act as officers, there could scarcely be any improvement 
in this line. It would seem that government control, wisely 
administered, would reach the same ends. Wherever the 
cities have managed their own gas-works there has been a 
tendency to furnish a better quality of gas, at reduced rates. 
Where good business methods have prevailed they have 
made a financial success of the enterprise ; where bad busi- 
ness methods have prevailed they have made a failure. 
Disposal of Public Franchises. 
One modern method of disposing of public franchises 
seems to be a solution of the problem in a very satisfactory 
way. That is, the putting up at auction of all franchises 
to which the public rights are granted, and disposing of 
them to the highest bidder, letting only to responsible par- 
ties. These franchises are granted for a limited period of 
time^ with the privilege of the municipality to purchase 
them at a normal price, or to renew, as it sees fit. In 
addition to this, the bid provides for the payment of a 
certain per cent, of the gross proceeds into the public treas- 
ury. A provision is also made that the article furnished 
shall be of a certain grade and furnished at a maximum 
price. With these restrictions there is no reason why the 
municipality should not realize the benefits of the monop- 
oly with certainty without government ownership. Under 
present conditions of most municipal governments this is 
far preferable to government ownership. 



ECONOMICS. 



455 



Economic Freedom Demands Restrictive Laws. 

A great many people seem to hold that while laws should 
be established for the control of civil liberty, the state has 
no right to interfere with the economic life. The growing 
importance of economic life, however, has rendered it 
the base of all modern operations. All legislation rests 
more, in these days, upon trade industries, commerce, cap- 
ital, labor, corporations, and industries in general, than 
upon the bare fact of securing civil and political justice. 
The latter has to a great extent already been secured in our 
own country. It appears that industrial liberty or eco- 
nomic freedom should be maintained, and that it is just as 
essential to establish some general laws and restrictions 
upon trade and industry to secure economic freedom as it 
is to make political and civil laws for the security of politi- 
cal and civil freedom; and that this can be done withoui 
the state passing beyond its legitimate function in provid- 
ing for the general well-being of the community. 

The Modern Trust. 
There has recently sprung up a form of financial organi- 
zation called the "trust," which has developed stupendous 
proportions. Within recent years it took the form of the 
organization of separate corporations into a pseudo over- 
corporation. The pseudo over-corporation took all of the 
corporations of a given industry into an association, issuing 
so much stock to each or else giving to each a certain pro- 
portion of the income of the new organization called the 
trust. That is, the business of the various corporations was 
held in trust by the super-organization, which might be 
dissolved at any time. There was a great question whether 



456 



ECONOMICS. 



the trust was responsible as an organization or not, as 
it held itself ready to dissolve at any time. But by the 
power of law it has been forced more and more to become 
one large corporation, absorbing into one definite organiza- 
tion all of the other corporations, the latter losing their 
identity in the former. 

The progress of the trust as it attempted to absorb all 
. competing industries in a given line has been very marked, 
and the rapidity with which the trusts have been organized 
and in which small industries have been absorbed has cre- 
ated alarm in the minds of the people. At the close of the 
year 1897 there were 111 trusts, none of which had a 
smaller capital than $1,000,000 ; while at the close of the 
year 1898, 98 more were formed, with an aggregate capital 
of about $2,000,000,000, — ^making the capital of all trusts 
formed by the close of the year 1898 equal to about $5,000,- 
000,000, or about one-fifth of the assessed valuation of the 
taxable property in the United States at the time of the 
census of 1890. The following are some of the principal 
trusts formed during the past few years, with their esti- 
mated or known capital: Joint Traffic Association, $1,- 
404,130,581; Federal Steel Company, $200,000,000;* 
Beading Coal Company, $150,000,000; Western Union 
Telegraph Company, $95,370,000; American Sugar Ke- 
fining Company, $73,936,000; Standard Oil Company, 
$97,500,000; Wholesale Grocers' Association of I^ew 
England, $75,000,000; Central Lumber Company, $70,- 
000,000; United States Leather Company, $62,711,100; 
Chicago and Milwaukee Brewers' Association, $60,000,- 
000 ; New England Insurance Exchange (84 fire insurance 

* The United States Steel Company has now a capitalization of $1,404,000,000. 



ECONOMICS. 



467 



companies), $58,53Y,167; Steel Eail Association, $50,- 
000,000; Chemical Combine, $50,000,000; Carnegie 
Steel Company, $35,000,000; Consolidated Gas Company 
of New York, $35,430,060. Some recently proposed or- 
ganizations are the Flour Trust, with a capital of $150,- 
000,000; the Knit Goods Company, with a capital of 
$30,000,000 ; and the Thread Company, with a capital of 
$18,000,000. With the opening of the year 1899 trusts 
with gigantic capitalization were formed with wonderful 
rapidity, to the great alann of many people. 

The chief objection urged against trusts by the people is, 
that they destroy competition and crush out the smaller 
concerns. That they destroy competition, is true to a cer- 
tain extent ; but as there has never been a complete organi- 
zation of any given industry, there is always a threatened 
competition. And it is a fact that on account of the con- 
centration of a given industry, prices are more stable under 
the organization of the trust, and that in the long run they 
average lower than under the competition of many small 
concerns. The wants of the community, both in manufac- 
tures and trade, are more carefully estimated by this means 
of social organization. 

That they crush out smaller concerns, is true ; and while 
the people at large may reap a benefit in reduced prices 
and more stable business life by the crushing out of the 
small concerns, it is a great detriment to the local com- 
munities where these concerns are established. In a West- 
ern town there was situated a barbed-wire factory — an 
independent concern, which had grown up from a very 
small beginning until it employed 200 men and did a very 



458 ECONOMICS. 

large amount of business. The trust absorbed this institu- 
tion into its main body. The object of tlie trust was to 
control the output so as to prevent prices from declining, 
as they had reached such a low basis that profits were very 
small, and they thus desired to hold to monopoly prices and 
monopoly profits. What was the result ? The owners of 
the local plant received a large sum for their factory, 
indeed much larger than the actual value of the plant under 
ordinary business prospects would warrant. It will be no- 
ticed that trusts always pay high for local enterprises. This 
means that they anticipated making larger returns than 
were made by the smaller concerns when worked separately. 
It will be observed, however, that this can be done only by 
the reduction of expenditures and by the establishment of 
monopoly prices. It is a mistake to suppose that because an 
organization controls an entire industry it can charge such 
prices as it pleases. Yet many investors in stock of trusts 
called "industrials" are led to suppose this to be true. The 
fact is, after they become complete monopolies they must 
be controlled by monopoly prices and monopoly profits 
and threatened competition. (See Monopoly Profits, 
supra.) Another result is, that a large amount of money 
has come into the town which will immediately seek other 
investments, — probably in the town itself; and while the 
trust destroys one business in the town, it leaves a large 
amount of free capital to invest in other businesses. 
Another result in the case in point which is more detri- 
mental to the progress of the town is, that 200 men with 
their families, probably 1,000 persons in all, are thrown 
out of employment. Many of these will leave for other 



ECONOMICS. 459 

places, and, unless as stated other businesses spring up, 
trade will fall off with the merchants and a general detri- 
ment to the community will ensue. This local destruction 
of business is one of the greatest evils of the modern trust ; 
yet even it may have a compensation in the fact that a 
large amount of capital is freed for new enterprises, — and 
it is, after all, the free capital of the community that makes 
a business. 

Another objection to the modern trust made by the peo- 
ple is, that the power of concentrated capital to influence 
legislation is great, i^o doubt this is the greatest danger 
in connection with it. It has this power if it desires to 
use it. Yet the danger here is not as great as it might 
appear, for when a trust controls the entire output of any 
industry it has less desire to control legislation in its own 
interest than have several large competing concerns which 
attempt to take advantage of one another. Nevertheless, 
because they are never free from competition, as com- 
petition is between corporation and corporation and trust 
and trust, there may still be a desire for influencing legis- 
lation in various forms. 

It is objected that trusts raise prices by restricting pro- 
duction, and keep down wages. The fact is, the trusts to 
date have paid as high wages as the lesser corporations; 
and when it is observed that there is an opportunity to pay 
higher wages there than elsewhere, no doubt wage-earners 
will receive their full share of the business. Wages are 
certainly higher in proportion to interest and profits under 
the higher organization of industry than under the lower, 
where there were many competing groups. The real truth 



460 ECONOMICS. 

about the trust is that it becomes a great corporation which 
will terrify us by its size, but which may be regulated by 
careful legislation so that its dangers, may be turned into 
benefits to the people. 

The United States enacted an anti-trust law in 1890, 
which declares that combinations, or contracts in the form 
of trusts or otherwise, or even a conspiracy against trade 
or commerce throughout the several states of the Union 
or with foreign nations, was illegal ; and insisted that every 
person or combination of persons who attempt to monopo- 
lize any particular trade or commerce among the several 
states is guilty of a misdemeanor. Many states also have 
attempted to make laws against trusts, and have succeeded 
at least in bringing before the people the subject of trusts, 
and in creating a great deal of discussion as to its nature, 
benefits, and dangers. 

" Government by Injunction." 

The anti-trust laws and interstate commerce act have 
been responsible for introducing a new form of regulation, 
called "government by injunction." It is simply the en- 
largement of the restraint which is exercised to prevent 
certain acts of individuals which are contrary to law. It 
is used largely for the control of labor organizations. This 
has been extended to apply to parties engaged in strikes. 
If strikers conduct themselves so as to restrict trade or 
commerce among the states, they are guilty of violation of 
the law. The injunction was used in 1894 merely to 
facilitate the application of these laws and to prevent their 
violation. The anti-trust law of the United States and of 
the various states would include labor organizations under 



ECONOMICS. 461 

its operations; therefore these laws are far-reaching, and 
have a tendency to show the magnitude of the trust ques- 
tion and its regulation. 

Most of the trusts formed are broken down or will break 
down; many are being formed now on a fictitious basis, 
developing a great volume of stocks and industrials which 
sooner or later must lead many to failure. Many which 
survive the shock of public opinion or adverse legislation 
will pass into the form of gigantic corporations, whose 
actions will be amenable to the law. While the rapid 
development of trusts has caused unnecessary alarm^ 
they, like other forms of industrial life, need regulating 
by the laws of the United States and the various states 
thereof. The courts and the legislative power, if properly 
directed, will certainly regulate trusts so that they will 
prove a benefit rather than a detriment to the people at 
large. A uniform tax, if properly levied, would bring 
these organizations into subjection to the will of the people. 
A tax which would destroy the extra business profit gained 
thereby would be not only constitutional, but effective in 
the regulation of trusts. It would be constitutional be- 
cause it would be attacking a certain form of trusts, and 
such a tax would come in under the police regulation. 
It is a question which the modern student must examine 
very carefully. Whether eventually it will lead to social- 
ism, no one can tell; but the author apprehends that it 
will not. 

State Socialism.* 

Some go so far as to advocate government ownership 
of all industries, all lands, mines, manufactories, means 

♦ See Chapter VUI, Bk. II, Part EL 



462 



ECONOMICS. 



of transportation, stores, — and in fact that all industries 
should be placed under the state management, and thai all 
persons should be employed by the state, each then receiv- 
ing his remuneration from one central authority. This 
is not at all necessary for the security of economic or in- 
dustrial freedom. It is also accompanied by many dan- 
gers, from the fact that no formula will cure the selfish- 
ness of human beings, and that state socialism wo\ild 
be merely the means of concentrating such selfishness. 
Power given to the people in this manner to regulate all 
industries would end only in the few regulating the many^ 
with the result of a revolution on the part of the many. 

Significance of Public Economics. 

Public economics have become very important in mod- 
ern industrial life. It is impossible to consider private 
economics without coming in contact with the relations 
of the state to trade and industry. ISTo persons can justly 
be considered well versed in political economy, nor indeed 
understand the full relations of the people to one another, 
without a full consideration of public economics. 



ECONOMICS. 463 



CHAPTEE III. 

TAXATION AND REVENUE. 

Relation of Taxation to Private Economics. 

The question of taxes is one of distribution, generally 
speaking, because it must be considered as one of the ways 
in which the surplus product is disposed of. Also, it may 
be considered as the means of a part of production, inas- 
much as it stimulates production and the producer must 
enter it as one of his necessary expenses. Burdensome 
taxes may oppress industries and prevent the development 
of economic life; A tax that is not burdensome may do 
nothing more than stimulate the extra energy necessary 
for the increased production to cover the amoimt of the 
taxes. 

Taxation a Means of Improving Economic Processes. 

Because of the expenditures of the government in main- 
taining roads, promoting justice and equality, and pro- 
tecting life and property, taxes are among the best invest- 
ments for the improvement of economic processes. While 
we may speak of private economics and the great laws of 
supply and demand, we must understand that these laws 
would not develop without proper governmental protection, 
and that taxes are absolutely essential for the development 
of all economics. Especially is this so when we consider 
public economics; for we find the tax system closely re- 
lated to public economics. We cannot escape its use or 



464 ECONOMICS. 

its importance under such circumstances. Taxes should 
be administered with a great deal of care, and their as- 
sessment and collection and expenditure more carefully 
guarded than almost any other public institution. 

Definitions. 

Taxes have been defined as forced contributions of the 
people for the support of the government. They are not 
debts in the ordinary sense of the word, for they are not 
contracted by the payer. N'either are they paid for pro- 
tection of life and property, but are placed in the general 
fund for government disbursement. As there is only one 
party to the transaction, they are called one-sided trans- 
fers, or forced contributions. 

Judge Cooley defines taxes as "being the enforced pro- 
portional contribution of persons and property levied by 
the authority of the state for the support of the government, 
and for all public needs." This definition upon the whole 
is correct from an economic standpoint, with the exception 
that taxes are sometimes levied, not for the purpose of pub- 
lic need, but for private appropriation ; but if we include 
in all public needs all public expenses, or those funds 
which the government needs for carrying out all the func- 
tions of government, then the definition is correct. For, 
indeed, the constitution of 'New York provides that "the 
assent of two-thirds of the members elected to each branch 
of the legislature shall be requisite to pass a bill appropri- 
ating the public moneys for local or private purposes." 

Paul Leroy-Beaulieu, in his Traite de la Science des 
Finances, defines taxes in these simple words: "Taxes 
are simply contributions demanded of citizens as their 



ECONOMICS. 



465 



share of the expenses of the government." And in a more 
elaborate manner, he continues on a subsequent page: 
^'Every contribution regularly demanded of the citizens by 
the stated authorities of the land for meeting the expenses 
of the government, is a tax." Again, if we are to take 
this definition in its full meaning, we must include in that 
term "expenses of the government," all expenses of the 
government in fulfilling its legitimate function as a rep- 
resentative of the nation. We must also say, in addition 
to this, that taxes are sometimes levied for the purpose 
of encouraging manufactures, as in the case of the pro- 
tective tariff; for the sake of rendering void a law, as in 
the case of the Federal taxes on state bank notes, for sup- 
pressing their circulation; or, in the case of the extensive 
taxes on whisky and tobacco, for the purpose of suppress- 
ing vice. So that, in the definition, taxes may mean some- 
thing more than the collection of revenue for the bare 
support of the government machinery. 

There is a legal fiction that taxes are given in exchange 
for protection ; but it will be noticed that the sovereign 
state demands this contribution of citizens regardless of 
any value which may come to the citizen in return for the 
contribution. The law, itself, always fails to recognize 
in taxation any of the principles which apply to purchase 
or sale and to contracts and debts resulting therefrom. 
But do not taxes, in an indirect way, benefit the tax-payer ? 
Certainly they do, but not in a way similar to that implied 
in a contract arising through purchase or sale. While 
there is but one party to the proceeding, the other party 
may, in an indirect way, on account of the keeping up 



466 ECONOMICS. 

of social organization and the improvement of tlie mean;? 
of creating and holding property, reaj) a just reward in 
this general return. But suppose a person says, "I do not 
want to be taxed, and I'll not enter into this contract; I 
don't want to be protected, — I can take care of myself." 
Does the state pay any attention to him, and release him 
from his share of the obligation ? 'No ; he is a part of the 
great social organization, which has determined by long 
custom, common consent, and legal authority, that a cer- 
tain amount of funds shall be collected from each indi- 
vidual citizen according to his person or his property, 
and that these common funds shall be expended for the 
general use of the community; and as long as he remains 
in a community the individual must pay the taxes. 

There is sometimes an assertion made in this connec- 
tion, that taxes, though paid into the public treasury, will 
in time turn to the pockets of the tax-payer. But this is 
a false supposition, if we try to make it specific. Suppose 
a farmer pays $50 in taxes. In order to get this $50 he 
sold the produce off his farm. ISTow, if the government 
does not lay out the $50 in farm produce, it will not revert 
to the farmer. Suppose the government does expend $50 
for this same farmer: it will do it by purchasing $50 
worth of produce; that is, the tax-collector, the agent of 
the government, says: "You may have your money back 
by paying me its equivalent, $50 in produce." Upon this 
basis we have an extended argument that the keeping of 
soldiers and sailors will increase the demand for products, 
and thus will enhance the general welfare of the commu- 
nity. But this is only a nominal market and not a real 



ECONOMICS. 



467 



market. To keep useless industries for the sake of enlarg- 
ing the market is a false theory. The only way in which 
taxes can help industry by the expenditure of funds, is 
to make a better system of communication, to keep better 
order, or to bring about favorable conditions of business. 
So, also, for the protection idea. The person who pays 
the least taxes may sometimes require the greater protec- 
tion of life and property, and he who pays most may be 
in a position to better protect himself and his property 
than he who pays little. 

Purposes of Taxation. 

Taxation, then, though it is easily defined and seems a 
simple thing, becomes of great magnitude when we begin 
to inquire into the philosophy of its existence, into all the 
relations to which it gives rise between the governing and 
the governed. It is a question of supreme importance, 
of far-reaching consequences. " Taxation may create 
monopolies, or it may prevent them ; it may diffuse wealth, 
or it may control it ; it may promote labor or equality of 
rights, or it may tend to the establishment of tyranny and 
despotism ; it may be used to bring about reform, or it may 
be used to aggravate existing grievances and foster dis- 
sensions between classes; taxation may be so contrived 
by the skillful hand as to give free scope and every oppor- 
tunity for the creation of wealth or for the advancement 
of all true interests of states and cities, or it may be so 
shaped by ignoramuses as to place a dead weight upon a 
community in the race for industrial supremacy." (R. 
T. Ely.) 

Taxes, then, have for their purpose the general good 



468 ECONOMICS. 

of the community, and so long as they tend to give this 
and are levied with a fair measure of equality, they sub- 
serve their purpose and affirm their right to existence. 
When taxes are once paid into the treasury of the govern- 
ment, their disbursement may take place, not only for the 
expenses of the government machinery, but also for the pro- 
tection of industries as a means of directing society in 
certain channels, and for general public improvement. 
The whole community is to be benefitted, directly or in- 
directly. (See Kentucky Court of Appeals Case, Cooley^ 

489.) 

Canons of Taxation. 

Although taxation is comparatively modern, we have 
found that systems have developed along with the progress 
of modern government. They have been practiced long 
enough to develop a certain number of principles which 
lie at the foundation of the philosophy of good govern- 
ment. 

Many of these principles were advocated by Adam 
Smith, and have been reiterated by all writers on taxation 
from his time. The first general principle is, that the 
subject of every state ought to contribute to the support 
of the government as nearly as possible in proportion to 
his respective ability, this ability being estimated by the 
amount of revenue he enjoys under the protection of the 
state. And by this last sentence it is understood that, liv- 
ing within and under the protection of the state, the 
amount of revenue which he enjoys is to be an index of 
his ability to pay for the support of the general good ; 
or as Mill says, " Equal taxation is equality of sacrifice." 

People as a rule do not like to be taxed, because they 



ECONOMICS. 469 

do not receive an immediate and tangible return for what 
thej pay out, as they do in the case of the exchange of com- 
modities. The return which they get is, indeed, very 
general and indirect. But there is an indirect return 
through the general good of society of which the individual 
tax-payer is a member. 

They also object to the payment of taxes because they 
imagine that they are unjust. And, indeed, no one ever 
knew a tax without a grain of injustice. John Sherman 
said in one of his speeches in the Senate, "I never knew 
a tax that was not odious and unpopular to the people 
who pay it" ; while Mr. McCulloch has succeeded in utiliz- 
ing two of Pope's lines as follows : 

" Whoever hopes a faultless tax to see, 

Hopes what ne'er was, is not, and ne'er shall be." 

And doubtless this is a successful application of poetry 
to economics. But still, Sherman's strong assertion needs 
some qualification, for there certainly is a difference be- 
tween a popular and an unpopular tax ; and while no one 
really enjoys taxation, not all taxes are odious. But the 
liability to fraud leads a man to imagine that he is paying 
more than he ought, and that there is a way of escape. 
This causes dissatisfaction, and a tendency on the part of 
many to evade taxation. However, it should be stated that 
a tax should be quite satisfactory to the people who pay it, 
and should be so assessed as to give the least possible 
opportunity for fraud. 

Another well-known principle is, that taxes ought to 
be certain, and not arbitrary, as to quantity, time of pay- 
ment, and manner of payment. In feudal times, and 
—29 



470 ECONOMICS. 

sometimes indeed in modern history, the principles of 
taxation have been violated in this respect. Kings and 
potentates have levied taxes suddenly, and without ■warn- 
ing, and collected them in an arbitrary and offensive man- 
ner, thus violating this principle. But modern assessments 
have tended to recognize all of these principles, as to the 
certainty of taxation, and a fixed time of payment, and 
have specified clearly the manner in which these taxes 
must be paid. 

A third principle is, that taxes ought to be levied in the 
manner most suitable to the payer; that is, the time and 
manner of payment should be as best suit his convenience. 
The preceding principle holds to the definiteness of pro- 
cedure, while the latter holds that this definiteness should 
be so arranged as to best suit the convenience of the tax- 
payer. Thus, it is more convenient for the farmer to pay 
his taxes soon after he receives returns from his harvested 
crops; persons receiving wages by the week or by the 
month could more readily pay their taxes quarterly; and 
a day-laborer finds the most convenient to pay is that 
which he pays daily through a tax on commodities. Gen- 
erally, enlightened nations are beginning to observe this 
rule to a considerable extent, for we find that the con- 
venience of the tax-payer is consulted in the times set 
for the payment of taxes. 

One of the most important of the principles of taxation 
is, that taxes ought to take as little as possible out of the 
pocket of the tax-payer over and above what is paid into 
the public treasury. This is an argument in favor of the 
careful expenditure of funds, as well as the proper method 



ECONOMICS. 471 

of assessment and collection of them. An improper tax 
may lead to great injustice by taking unnecessarily from 
the pockets of the people what ultimately reaches the 
treasury, a surplus that is expended in the collection of 
the tax, or that reaches the pocket of corrupt officials. Or 
again, if a greater assessment is made than is required 
to meet public needs, it results in heaping up in the public 
treasury a large amount of funds, which may lead to ex- 
travagance, and that in turn lead to injustice. 

The economic idea of taxation is, that the fund collected 
as tax is to be more profitably expended by the govern- 
ment than it would be if left to private enterprise. Being 
drawn from the combined earnings of all the citizens, the 
tax is to be so handled that it will yield a larger economic 
return than the tax itself; and also a larger return than 
the money would yield if handled in small amounts by 
the individuals themselves. Sometimes taxes have been 
so heavy as to be little better than robbery. So much was 
taken out of the pockets of the people that it burdened the 
industries which they tried to carry on, and thus the taxes 
were a positive detriment to the entire community. But 
in this connection it may be said that the least tax is 
not always the best tax; for, while it is a very bad plan 
to have an extravagant tax, a niggardly tax which barely 
supports the functions of the government is a detriment 
to the progress of the people. Correct financiering will 
avoid an overflowing treasury and a lavish expenditure, 
or a government bordering on paternalism, on the one 
hand; and on the other it will avoid an empty treasury, 
and a meager outlay that barely keeps the government in a 



472 



ECONOMICS. 



proper existence and does nothing for the general welfare 
of the people. Thus, the building of bridges, public parks, 
and highways, the development of the systems of super- 
vision and inspection which enhance the power of economic 
■society, can all be carried on better under the direction of 
the general government than they would if left to the 
haphazard, irresponsible, irregular ways of individuals. 
Just and Equitable Taxation. 
A great deal has been said about just and equitable taxa- 
tion. And these indefinite terms have led to a large meas- 
ure of senseless discussion. Doubtless, a just and equita- 
ble taxation is the one least burdensome, although these 
taxes cannot fall equally upon all individuals. There must 
be discrimination. The basis of operation should always 
rest upon equality of sacrifice, and should never involve 
unnecessary taxation of anyone. It is said that there is 
a tendency in taxes to move along the line of least resist- 
ance ; which, if it be true, means that somebody pays more 
than his share, while others escape. Owing to the nature 
of taxation, it having sprung up irregularly through the 
development of society, it has been a very difficult matter 
to adjust it so that each one should bear his own proper 
share of the expenses of the government. Taxes were first 
paid by the weak and those unable to resist them. Indeed, 
to-day it may be said that of all the great questions before 
the American people, that of equal and just taxation is the 
greatest. Our system has been in confusion for a period of 
years, and, as time develops, we see very little order com- 
ing out of the chaos. We need a thorough revision of our 
tax system, which shall combine harmony, simplicity, and 
proper discrimination in all assessments and levies. 



ECONOMICS. 473 

Incidence of Taxation. 

A subject which has caused a great deal of discussion 
in the theory of taxation, and about which there is much 
controversy to this day, as it is still an unsettled question, 
is that of the " Incidence of Taxation." By it we indi- 
cate or determine uj)on whom the tax ultimately falls. A 
tax is sometimes levied upon one person and seemingly 
paid by him, but in reality has been shifted to another; 
and the incidence of taxation answers only one question, 
viz. : UjDon whom does the tax ultimately fall ? A tax 
may be borne by the person upon whom it is levied, or it 
may be shifted to others, who in turn may shift it to a 
third party. And this shifting may be done either know- 
ingly or unknowingly by the person who shifts. We 
should carefully discriminate between shifting and evasion, 
for evasion is simply a failure to pay a tax at all by 
avoiding it, while shifting is the process of referring the 
tax to others to pay. But in this respect we do not at all 
consider the effect of taxation, but merely upon whom the 
taxes fall. It is, then, a question of great importance, for 
indeed upon it the whole theory and practice of modern 
taxation rest. 

The theory was discussed as early as 1651 by Hobbs, 
in his Leviathan, who advocated a general excise so that 
those who paid taxes would not f-eel them a burden, not 
knowing when they pay them nor how much they pay. 
And Cradock holds that taxes should fall so that the 
burden will be borne insensibly by the tax-payers. And 
Thos. Mun, in 1664, held that in proportion as the nec- 
essaries of life increase in value, so the rate of wages will 
rise, and taxes will be shifted accordingly from the wage- 



474 ECONOMICS. 

earner to tlie employer and the rich. Sir William Petty 
held, in 1672, that under such circumstances the employ- 
ing producer will bear the taxes because the incidence 
falls on liim. The question received much discussion 
from time to time, and has been revived of late by Mr. 
Seligman, Mr. Eoss, and others. A careful inquiry into 
this principle will show us that many of our so-called 
direct taxes may in time be shifted as are the so-called 
indirect taxes; so that really the distinction between di- 
rect and indirect taxes is largely in the mind of the legis- 
lator as to what he intends shall be direct and indirect, 
rather than in the practice of the tax itself. 

The poll, or capitation tax, must fall upon the indi- 
vidual upon whom it is laid, and cannot be shifted, except 
when it falls upon the wage-earner, and then it will not 
be shifted unless it falls upon the margin of his necessary 
subsistence. That is, when wages are below the nominal 
rate and taxes are laid upon wages, they will be shifted 
to the employer ; when wages are above the nominal rate, 
taxes upon the wage-earner will be borne by him. 

Taxes upon inheritances and bequests cannot possibly 
be shifted; the property is in sight, and it must yield to 
the return of the levy. An internal tax may or may not 
be shifted, though in the greater majority of cases it is 
shifted in whole or in part. The tax on imports is gen- 
erally called an indirect tax, and as a general rule it will 
be shifted in whole or in part, although exact determina- 
tion will depend upon each individual case. The tax on 
monopolies cannot be shifted, except in special cases. 

The income tax, though a direct tax in theory, may fre- 



ECONOMICS. 475 

quentlv be shifted to others. Take, for example, the in- 
come tax of England, which is a combination of taxes on 
separate categories of income, and it happens that it is 
merely a tax on gross revenue or gross receipts; and in 
such cases it is generally true that the income tax follows 
the movement of other taxes in regard to incidence. In a 
case where a tax is laid on pure income, it is really a tax 
on economic rent added to the tax on net profits and the tax 
on wages. ISTow, we know that taxes on economic rent 
and net profits cannot be shifted, except in the case of 
wage-earners, and it will have a tendency to stay where it 
is placed in regard to wage-earners. jSTevertheless, these 
are only tendencies, and we have no absolute assurance 
that an income tax in a country where we find no pure 
income will remain where it is put. 

Kow the difficulty in all taxation is not found in the 
fact that some taxes can be shifted and others cannot, but 
it is in knowing just when taxes will be shifted and when 
they will not, so that we can understand upon whom the 
taxes will fall, and thus double taxation and unjust levies 
be avoided. If a person desires to reach certain members 
of society directly, let him choose the group of taxes in- 
cluding those on monopoly, net profits, inheritances, and 
certain forms of property and income. If he desires to 
reach persons indirectly and have taxes paid unawares by 
the payer, let him choose taxes on commodities, in the 
shape of import duties, special excise duties, licenses, and 
taxes on gross receipts and corporations. 
Classification of Taxes. 

Perhaps, before we go further into this discussion, it 
will be a good plan to outline briefly the various kinds of 



476 EcoNOjtiics. 

taxes in common use in our country, and generally through- 
out other countries. The first great division of taxes is 
in respect to direct and indirect taxes. It must be stated 
that this classification is of comparatively little value as 
the incidence of taxation becomes better understood. It is 
of more difiiculty to determine what is a direct tax. 

Direct taxes are those supposed to fall immediately upon 
the person who ultimately pays them. They have their 
various advantages : they are said to promote good citizen- 
ship, because the person who pays knows to what extent 
he has paid, and for what purpose, and having paid so 
much into the treasury he will follow it more closely to 
see that it is justly expended than he would in many cases 
where he does not know how much he has paid nor for 
what purpose. 

Direct taxes are said to be less expensive than indirect. 
In 1881 the cost of collecting the taxes on commodities 
was estimated at 5.13 per cent., while the cost of raising 
the revenue from direct taxes in 1876 was 3.5 per cent. 
In Prussia, in 1860, the direct taxes cost 4 per cent, and 
the indirect taxes, with the exception of the Salt Monopoly, 
cost 12 per cent. In 1883 and 1884 the cost from direct 
taxes was 7 per cent., while those revenues from indirect 
taxes had fallen in cost to 9-| per cent. 

Poll Tax. — The poll tax, as is indicated by its name, 
falls upon the individual. It is an old form of taxation, 
arising from feudal times out of service to the feudal 
master. There is a renewal of this old-time service when 
the commissioner summons me to appear on the street at 
a certain hour of the morning with a shovel to work out 
my road tax ; it is a reminder of the old feudal regime. 



ECONOMICS. 477 

A great many object to the j)oll tax because if a person 
is poor and unable to pay it there is danger of his being 
reduced to poverty and then relegated to the ranks of 
paupers and criminals; it is idle to collect taxes of this 
class to keep up almshouses and prisons, while we are 
making the class larger all the time by so doing. While 
there is a grain of sense in this, there is another side to 
the subject. Taxation when not excessive stimulates pro- 
duction rather than represses it. There is a happy mean 
to be maintained in all transactions. Productive enter- 
prise will be enhanced and capacity for economic produc- 
tion will be made greater, and by the use of moderate taxa- 
tion one will redouble his energies. Then, there is a 
question of citizenship. I believe that a person who is 
not frugal enough, industrious enough, and manly enough, 
to earn two or three dollars a year to pay for the privilege 
of citizenship, has no right to be a citizen. If taxation 
without representation is tyranny, taxation is also a badge 
of liberty, which every man should bear in some form or 
other. It is true, you say, he does bear that in the taxa- 
tion on commodities. To a certain extent that is true. 
ISTevertheless, I believe it is a good thing if he be sum- 
moned by the proper authorities to "appear with a shovel," 
that he may understand that there is a government over 
him whose interests he is bound to respect. 

Income Tax. — The income tax is, theoretically, the most 
nearly correct tax that we have, but yet the most difficult to 
collect. It falls upon the net income of individuals, and 
therefore fulfills the canon which requires the tax to vary 
according to the revenues which people enjoy. If a man 



478 ECONOMICS. 

has no income, then he will have no tax ; if his income be- 
comes greater, his taxes become greater accordingly; if 
his income declines, his taxes decline also. The difficulty 
has been that in practice, the tax does not vary so much 
with the rise and fall of income, as with the ability and 
inclination of the payer to evade the tax. Our experience 
with the Federal Income Tax, from 1861 to 1872, a period 
of ten years in actual operation, was very unpleasant. It 
came upon us suddenly, as an episode and as a war meas- 
ure, and was to be only provisional. During its whole ex- 
istence the laws were modified each year by Congress trying 
to readjust matters so that the tax might fall with equal 
justness upon all and without complaint. The income tax 
failed because it did not have a fair trial ; because it was 
poorly managed from the beginning; because there were 
those who disliked it on acount of its being too just for 
them; and finally, on account of the unwillingness of 
persons to give proper returns. 

The income tax has been tried in a mild way in Penn- 
sylvania and in other states, but it has never gained a 
great success in America. However, we know that it has 
been successfully tried in Prussia, in Switzerland, and in 
England. In England it is a part of the general system 
of taxation. It was introduced in 1798 by William Pitt 
as a war measure, and intended to remain only' during a 
short time. It gradually grew into the English system, and 
though the same complaints of unjustness are urged against 
the tax as ever, it is still retained as a part of the system, 
and probably will be on account of its general easy man- 
agement. The English income tax is based upon what is 
known as the sliding scale. 



ECONOMICS. 479 

A few years ago a new income and property tax was 
established in Switzerland, in the canton Vaud. Since 
then it has been developed in other cantons of Switzer- 
land. All real property is divided into three grades. For 
all estates whose capital, maximum value, is $3,000, the 
rate of taxation is one per cent, per thousand; maximum 
capital $20,000, rate 1^ per cent, per thousand; on all 
capitals exceeding $20,000, the rate is 2 per cent. Per- 
sonal property also is divided into seven grades, and as- 
sessed at 1, 1-|, 2, 2^, 3, 3^ and per cent, per thousand 
for respective grades. Incomes are divided into seven 
classes, and $80 is subtracted from the income for every 
dependent upon that income before the tax is levied. 
Thus, a man who has ten children and $1,000 income 
would have to pay a tax of fifty cents, while a bachelor 
with the same income would have to pay a tax of $15. And 
one wonders in this case how much the government would 
owe the man with fourteen children ! Possibly he should 
draw a pension from the government for at least three of 
them. Whatever we might say of France and America, 
doubtless this is an encouragement which Switzerland does 
not need, i. e., that of large families. 

The general arguments used against the income tax 
formerly in force in this country are as follows: 

First, it was claimed to be unconstitutional; 

Second, it required government inspection of private 
interests ; 

Third, as improper returns were given, it led to dis- 
honesty and to an unjustness of taxation ; 

Fourth, it discriminated between persons having large 
and those having small incomes. 



480 ECONOMICS. 

Fif til, it was an odious tax, hated by the people ; 

Sixth, it was an expensive tax. 

There is not sufficient space to discuss all of these va- 
rious objections. It is pertinent to say that the party 
which objected so strongly to the income tax during the 
war, subsequently undertook to place it in practice again. 
Its constitutionality has been twice decided; once in its 
favor, and more recently against it. That it was obnoxious 
and evaded, no one can deny ; but that it did not have a fair 
trial and was not properly managed, is easy to affirm and 
prove. Doubtless, it was one of the least injurious taxes 
levied during the war, and with the exception of the tax on 
national hanks it was the cheapest tax levied. The dis- 
crimination of this tax was not greater than is now found 
in the personal-property tax of to-day, and a careful exam- 
ination into our own real-property tax will show us that 
the latter has many evils attributed to the income tax. 
Yet the experiment in the time of a great war, when all 
is confusion, is not a sufficient test of the effectiveness of 
any method of taxation. However, it appears to me that 
if we return to the income tax, it should be a part of a 
great system of taxation, and should be a state rather than 
a federal tax, and that it should enter' permanently into 
our system in harmony with other taxes; not to be used 
as a temporary affair for the raising of funds for a few 
years. 

Real-Property Tax. — The real-property tax is one of the 
oldest known taxes. Taxes upon real property, or im- 
movable property as it is called in Europe, means taxes on 
lands, houses, mills, factories, etc. 

There is one great advantage of the real tax, that the 



ECONOMICS. 481 

property upon which it is assessed is always displayed; 
it can be found and recounted; — and this has led us to 
think that it is more nearly just than any other. But a 
careful study of the property tax in America leads us to 
discover many errors and unjust discriminations. Com- 
pare the estimation of property and taxes levied in any 
county with other counties of the state, and also with other 
states from the Atlantic to the Pacific, and such a variety 
of assessments and rates is indeed astonishing. I have 
heard of cases, too, of actual fraud, where a certain man 
of a good deal of power and influence has his taxes set 
at a certain rate. A new assessor being elected, desiring 
to make all things equal, raises the assessment a little. The 
result is, the wealthy man goes before the board of equali- 
zation and has it reduced to what he terms its proper 
proportion. A few examples of this kind serve to rele- 
gate such assessor to the background in politics. 

Personal-Property Tax. — The personal-property tax, 
which has been so long in vogue, is doubtless as difficult 
to assess as is the income tax. It is difficult to-day for 
the assessor or for the person who makes the returns to 
give a just estimate as to the proper assessment. The 
number of irregularities in this tax is greater to-day than 
in any other tax that we have. It is certainly the worst 
tax that we have. But we ask, why is it not abolished ? 
For the reason that it is supposed to reach a certain class 
of property which cannot be reached in any other way, 
and if all taxation were taken from personal property 
there would be a tendency to turn, either permanently or 
temporarily, a large class of property into the form of 
what is known as personal property. There have been 



482 ECONOMICS. 

somie attempts to reform the present personal-property 
tax bj taxing mortgages and other forms of secnritj, but 
as a rule thej have only made bad matters worse. 

From 1871 to 1884 there was a shrinkage of assess- 
ment of personal property in the city of l^ew York of 
$107,184,371; yet everybody knows that the amount of 
real property increased very rapidly during that period, 
and everybody knows that the amount of personal prop- 
erty has kept pace with the increase of real property. 
It is said, also, that in the city of Philadelphia there 
are fewer watches possessed by the private citizens each 
succeeding year. It is true that the faithful assessment 
and collection of the personal tax varies greatly in different 
states, and in different towns, which shows that there is 
a possibility of improving bad taxation. Either this tax 
ought to be reformed through a better political conscience 
or a better system of public administration, or it ought 
to be done away with entirely. 

Franchise Tax. — rThe franchise tax is rapidly coming 
into vogue in Europe and in many of the eastern states 
and cities. It seems to be one of the best taxes that we 
have for reaching corporations ; and by that I do not mean 
that the corporations should pay more than their propor- 
tionate amount of taxes, either in this or in any other 
form. It is becoming customary to grant franchises on 
the agreement of the company to pay a certain per cent, 
of the gross receipts into the public treasury. These fran- 
chises are let for a term of years to the highest bidder. 
The method has certainly worked well. 

Inheritance Tax. — Another form of taxation is the in- 
heritance tax, a tax much considered in these days. The 



ECONOMICS. 483 

Maryland law taxes collateral inheritances over $500 at 
a rate of 2| per cent. New York and Pennsylvania have 
voted a 5-per-cent. tax on collateral inheritances. But 
New York has adopted a direct inheritance tax of 1 per 
cent., and it is said that the estate of the late Jay Gould 
yielded a return of about $700,000. There are some fea- 
tures in connection with the use of the inheritance tax 
that would make it necessary to use it with great discrim- 
ination. However, there seems to be no real general op- 
position to it as a theoretically good tax. There would 
need to be careful discrimination in the case where a man, 
his wife and sons, had earned the farm by working to- 
gether cooperatively; and when he passed away it would 
certainly be injustice to tax the farm before it could pass 
into their hands. A great many other points might be 
cited in the application of this tax where it might lead 
to injustice. There is no reason, however, why a large 
estate should, without taxation, descend to a person when 
not willed to him. 

Indirect Taxes. — The indirect taxes are usually those 
levied upon commodities. They may be either internal 
revenue, or export or import duties. Indirect taxes are 
those supposed to be shifted to the consumers by the per- 
son who pays them. Theoretically they are considered 
to violate the principle of equal taxation; to obstruct 
trade ; to foster monopoly ; and are congenial to despotism 
and aristocracy. This is generally said of all indirect 
taxes. But the difficult question is, whether a direct tax 
or an indirect tax is wanted; or which will best sub- 
serve the purpose intended. Without doubt, the best sys- 
tem of taxation is a combination of the direct and indirect 



484 ECONOMICS. 

taxes. It is easy to criticize either group under present 
circumstances. 

The most prominent indirect tax of to-daj is the so- 
called protective tariff, — a tax of a peculiar nature 
which performs, at least in its full intent and purpose, 
a double function, that of raising revenue and protecting 
home industry. This tax has been before the people for 
nearly a hundred years; it has been the greatest political 
war-cry ever in existence. It has been magnified clear be- 
yond its just proportions in its power to improve or retard 
our industrial conditions. It is a question of great im- 
portance among a score of other important questions to be 
decided by our commonwealth. 

There is not space to enter into arguments for or against 
the tax on commodities, for protection or for free trade. 
We are doubtless all familiar with its oft-quoted argu- 
ments. The tariff controversy and tariff history are in 
themselves a solid year's study. Attention is called to 
a few principles which may have been overlooked in this 
great tariff discussion. 

The first principle is, that we cannot tell what is best 
for our nation by following the examples of others. In- 
deed, we find England prospering under free trade; 
France and Germany prospering under protection; and 
the United States has prospered under protection. It 
stands to reason that we should have prospered whether 
we had had free trade or protection, and that we shall pros- 
per, whatever system we adopt. It is also evident, at 
least, that it is not a matter so much whether we have 
high protection or low protection, or free trade, as 
that we know twenty or thirty years ahead what our sys- 



ECONOMICS. 485 

tern is that we have adopted, and can be sure that there 
will be no sudden changes or tinkering with this great 
system. For, whether the tariff has been a detriment to 
the United States or not, we know that various changes 
have been wrought through the crooked journey over which 
our financial life has come, which have been detrimental 
to the progress of the American people. A nation may 
need a tariff or it may not, just as a man may need an 
overcoat or he may not. In all probability he does not need 
an overcoat when the sun is burning down upon him and 
the thermometer records ninety degrees in the shade. 

It is sometimes held that the protective tariff improves 
the wages of the American laborer. Doubtless it has an 
indirect influence upon the laborer, but, it is to be feared, 
not just in the way in which it is sometimes claimed. In 
the past few years it will have been observed by those who 
have watched the rise and fall of wages, that this is to be 
attributed to more potent influences than that of the protec- 
tive tariff. The tariff has been entirely overestimated in 
its power to advance or retard prosperity. It is not 
a correct inference that because you raise the tariff 
on all kinds of iron products there will be a rise in 
the wages of the iron-workers. Indeed, as a rule, it has 
not proved true. Suppose there is a rise in the tariff on 
woolen goods: are the wages of the workers in wool in- 
creased ? Undoubtedly it is only through a general system 
of protective tariff, provided a nation is in a position to 
need one, that industries may be stimulated, that a greater 
demand for labor may be created, or that a standard of 
living may be kept up which will have a tendency to en- 
—30 



486 ECONOMICS. 

large the opportunity of the wage-earner to earn greater 
wages and will give him more ability to earn them. But 
this is only in a very general way, on the basis of a 
nation developing a variety of industries and its wealth 
of natural resources. 

Again, it is claimed that if an article bears a certain 
price without protection, its wholesale price will be equal 
to the first cost plus the protective duty. This is not al- 
ways true. There will be a tendency for the manufactured 
domestic product to rise to the equilibrium of the imported 
product plus the duty on it; but this point will seldom 
be reached, on account of the competition induced by 
stimulated industries. And it must be admitted that a 
protective tariff does stimulate industries. This is histor- 
ically correct; but the question is whether it stimulates 
industries at the expense of something else or not, or 
whether in the long run we shall not be better off not to 
have the industry stimulated for a short time, only to pass 
into a period of depression of the whole country. 

The prune industry of California is a good example. 
Prunes are destined to be one of the great fruit-foods of 
America. Suppose dealers can ship prunes into 'New York 
and sell them in the market three-fourths of a cent cheaper 
than can the fruit-growers of California. The question 
is, shall we put a tariff on prunes of three-fourths of one 
per cent., to allow California to have a fair competition 
in the market of our nation with that of Spain ? Can the 
prune-eaters of America afford that for the sake of devel- 
oping a great natural resource of America ? I think they 
can. Under such circumstances, a high tariff of three or 
four cents a pound might be quite a monopoly to a few 



ECONOMICS. 487 

individuals at the expense of a great majority of the 
people. 

And so we have a basis for the establishment of pro- 
tection on equality of sacrifice; each section would be 
benefitted according to the articles it has to protect. But 
that section which has no articles to protect either directly 
or indirectly may not gain much by the process. But the 
cardinal objection is, if Cuba can raise sugar cheaper than 
we can, why not let her raise it, and we will raise some- 
thing else in exchange for sugar ? This is one of the 
most forcible objections to the protective tariff. And it 
is easy to see that if a tariff becomes extensive it will work 
a positive detriment by destroying our foreign trade. It 
is not true, however, that it would be better for us to raise 
corn and cotton as England desires us to do, and let her 
do the manufacturing. That philosophy does not hold in 
economy, for there are other things to be considered in 
national life and national economy than this. (See Inter- 
national Values.) But in so far as a protective tariff is 
usually adjusted so as to improperly shut off foreign trade, 
it as a rule works a detriment to the nation that estab- 
lishes it. 

References: Adams, H. C, The Science of Finance; Ely, R. T., 
Taxation in American States and Cities; Seligman, E. R. A., Essays 
in Taxation ; Ashley, Percy, Modern Tariff History ; Taussig, F. AV., 
History of the Tariff. 



488 ECONOMICS. 



CHAPTER IV. 

A RATIONAL SYSTEM OF FINANCE AND TAXATION. 

Irregular Development of Finance and Taxation. 

The development of industry has led to many changes in 
the character of property. It has brought about an in- 
crease in the number of forms in which property exists. 
The aim of taxation has been to reach every new kind of 
property coming into existence. Thus, in the early period 
of the history of the nation, farming was the chief occu- 
pation. There was a very small amount of corporate 
property, a comparatively small amount of what is known 
as personal property in stocks and bonds and other wealth, 
and likewise a comparatively small amount in mills and 
factories. It was then a very easy matter to ascertain the 
amount of property each person had, and to assess it regu- 
larly. The property that one had represented the capacity 
to pay more nearly than it does when a variety of property 
has come into use. 

In the history of the development of taxation the state 
has attempted to do justice to all in levying a tax on each 
separate kind of property. It has resulted in a great many 
irregularities of taxation. While it has led to double tax- 
ation in many instances, it has also allowed certain kinds 
of property to escape paying its just proportion of taxes 
according to capacity. There has not been a systematic 
plan prepared for general taxation on a basis of the inci- 
dence of taxes. When a tax is once levied and collected 



ECONOMICS. 489 

on a given property, it is not easy to dispose of it or to 
change it for a tax of another kind; and the attempts 
made have been isolated and fragmentary legislation, 
which has tended to confuse matters more than would have 
been the case had the subject been approached in a more 
rational manner. As you cannot touch one method of 
taxation to reform it without interfering with the whole 
tax system, reforms in taxation should be in charge of a 
commission which would systematically study the effect 
of every kind of tax in the state, ascertaining carefully 
who really bears the burden of taxation. While every one 
feels the need of a reform in taxation, we perhaps shall 
never reach rational improvement until we go to work 
systematically and reform the entire system. 

Imperfections of Modern Taxation. 

The imperfections of taxation have arisen largely in the 
attempts of the government to reach all forms of property, 
on the one hand, and the attempts of people who possess 
the property to evade or to reduce taxes on the other. 
The system of rational taxation based upon capacity or 
equality of sacrifice has been departed from to a great 
extent. Many of the principles of taxation have been 
violated. 

Again, taxes have been collected for the purpose of 
carrying on public functions which might well have been 
dispensed with. Accompanying the expansion of industry 
has been the expansion of government. While the essential 
functions of government have remained steady, demanding 
an increasing amount of expenditure instead of a decreas- 
ing, other and new functions have been added to the gov- 



490 ECONOMICS. 

ernment, which have added to the burdens of the people. 
Even when it is correct in theory and principle and gen- 
eral expediency to introduce new duties of government, 
these new duties often have not yielded any adequate re- 
turn to the people for a number of years, and in the attempt 
to expand the service of the government of the people 
many things have been tried which have been nothing but 
a positive waste to the community. Many difficulties of 
assessment have also arisen to increase the evil conditions 
of the case. Fleeting forms of property have led to a pux*- 
suit by the legislator and the tax-gatherer which has in- 
creased the imperfections of the system. 

Methods of Collecting Bevenues. 

From the early history of this nation we have collected 
the national revenue largely from a tariff on imports. This 
has nearly always been accompanied by a plea for protec- 
tion to American industries. Wliile it has cost the people 
an enormous amount in proportion to the revenue, it still 
has been quite satisfactory to them as a method of raising 
revenue. The evil condition of it, so far as a system of 
finance is concerned, is in the fact that in attempting to 
gain the largest revenue out of it injustice may be done 
to certain classes of industries or certain sections of the 
country. On the other hand, in attempting to protect cer- 
tain industries or sections of the country, the revenue may 
be small and inadequate. Yet this tax has grown historic- 
ally into the nation, and is such a power in the develop- 
ment of the industry of the country that it is likely to be 
retained in the United States, although many times it 
may be detrimental to the best interests of the country, 



ECONOMICS. 491 

SO far as commerce and the rational development of in- 
dustry are concerned. 

The revenues from tlie sale of public lands, which were 
so important in the early history of the nation, have grad- 
ually declined into comparative insignificance. Revenues 
from incomes were collected in the war period from 1862 
to 1872. This tax was declared constitutional at one time, 
but a subsequent law, passed by Congress August 27, 1894^ 
was declared unconstitutional by decisions of the Supreme 
Court on April 8 and May 20, 1895. 

The tax on home products, which is also a tax on con- 
sumption, has long been a means of raising the public 
revenue. The tax on beer, liquor, tobacco, etc., seems to 
have become a means of raising revenue. There is no real 
reason why such commodities should be singled out of all 
others and taxed, except it is an easy way of taxation, and 
also aims at a luxury and an evil. It is difficult to ascer- 
tain the real influence of such a tax in suppressing evil, 
for it leads to adulteration of goods and falls heavily upon 
consumers, many of whom are among the poorer classes 
of people. 

Xew taxes, such as the franchise tax, largely in munici- 
palities, and the inheritance tax in states, have come grad- 
ually into use. The old tax on property has been a promi- 
nent factor in our system, although abandoned in nearly 
every other nation in the world. Wliile we have recog- 
nized the shifting of property to other forms, we still 
cling to the old form as a necessary means of raising reve- 
nue. So far as land is concerned, no better tax will ever 
be found ; but the taxation of improvements and personal 



492 ECONOMICS. 

property becomes more irregular every year oi its ex- 
istence. 

Double Taxation. 

The attempt to tax property in a variety of forms has 
led to much double taxation. Thus, when a state taxes 
the land and the mortgage and the money lent on the mort- 
gage, there is double taxation, and in some instances triple 
taxation. The mortgage was a new kind of property, 
and it was felt that the burden of taxes was falling upon 
the borrower and owner of the land, and not upon the 
lender of money. As the person who holds the mortgage 
generally shifts the tax upon the borrower, the latter* 
pays the tax on his mortgage. And then if he takes the 
money and puts it in improvements or stock on his farm, 
he pays taxes on that again. The man who has property 
in sight almost always does the heavy paying of taxes. 
The attempt to tax the income of a property with an addi- 
tional tax on the property itself, is another form of double 
taxation. Also, if a .man is conducting business and his 
property is taxed and then a tax is levied upon his business, 
he is taxed double. There can be nothing absolutely wrong 
in taxing the same person for the same thing in two differ- 
ent ways, but it leads to injustice if it develops a looseness 
of taxation which leads to inequality. When only a part 
of the people are thus taxed and others go free, injustice 
arises. 

It is wrong not to tax mortgages when a man's property 
is nearly all vested in them. Yet, as it is possible for him 
to shift this tax upon the mortgagee by charging him a 
higher rate of interest, it is idle to tax him. The prop- 
erty must be taxed in some other way, namely: that of 



ECONOMICS. 



493 



income. A direct income tax, properly classified, cannot 
be shifted. The question of debts in taxation is a grievous 
one. A man must be taxed, however, upon what he has, and 
not upon what he has not. The rational way of considering 
the taxation of mortgages is as follows: If the assessed 
valuation of a given farm is $4,000 and there is a mort- 
gage on this land of $2,000, it is evident the property in 
the land represents the entire property in question, on 
the supposition that half of the value is covered by the 
mortgage. ISTow all of the tax may be levied on the land 
and allow the mortgage to go free, or all of the tax on 
the land and allow the mortgage to be taxed in addition, 
or allow half of the tax to be levied on the mortgage and 
half on the land. There is no doubt that the latter method 
is the logically correct and just one, but wherever it has 
been tried it has proved detrimental to the borrowers, and 
those who borrow have been obliged to lose the amount of 
the tax in another way. 

Another difficulty arises in the constant shrinkage of 
the value of land. If the value of the land declines one- 
half and the mortgage be assessed at its full value, the 
mortgagee will be paying more than his proper proportion, 
unless he can shift it. The only way would be to assess 
the land at its full market value and then to insist that he 
pay a just proportion ; or, as I shall relate below, put the 
mortgage in an entirely different category and tax the land 
on its full valuation. 

Taxation of Corporations. 

Double taxation is more readily shown in the history of 
corporation taxes than in any other way. It illustrates 



494 ECONOMICS. 

the attempt of a tax to adjust itself to new kinds of prop- 
erty while still clinging to the old systems of taxation. In 
the early history of the United States the corporations were 
so few that when they did come into existence they were 
not noticed as having a special form of property. Finally^ 
they were treated as individuals under the general-prop- 
erty tax. But as time passed on it was realized that in 
the form of improvements, bonds, stocks, fixtures, etc., 
corporations had a variety of property which was not 
reached by the ordinary property tax. 

To meet these various forms of property, commissions 
for the taxation of transportation companies in certain 
states have been established. Corporations have been 
taxed by different methods in different states, according 
to the principles of taxation prevailing in those different 
states. 

The taxation of property has gradually given way to the 
taxation of certain forms which represent their tax-paying 
capacity. Among these forms we find: First, valuable 
property; second, franchises. These taxes may be esti- 
mated on cost of property, capital stock at par value, 
capital stock at market value, capital stock plus bonded 
debt at market value, capital stock according to dividends, 
capital stock plus total debt both funded and floating, gross 
earnings, net earnings, bonded debt or loans, business 
transacted, and dividends. These various methods of at- 
tempting to reach taxable property of corporations have 
caused confusion on account of irregularity within the 
state, and especially because various separate states have 
different methods of taxation which greatly interfere with 



ECONOMICS. 495 

interstate property and non-resident property-holders. It 
has led to double taxation in no less than five different 
ways. 

The importance of taxation of corporations is then very 
great. If the principles of the old property tax are to be 
maintained, they must be treated differently from individ- 
uals. If local taxation is to prevail, it should rest upon 
real estate only. A franchise tax of a certain per cent, 
of the gros's earnings of the corporation paid into the 
public treasury should be a constant factor in the taxation 
of all corporations, for the reason that they, having fre- 
quently special privileges granted them by the people, 
should thus make a public recognition of the same. Over 
and above this, a tax on their capital and loans might be 
a means of reaching all the paying capacity of the corpo- 
ration. If the property is taxed, the capital stock should 
go free, and if a tax is placed upon loans, then no tax 
should be laid upon bond-holders. 

Interstate agreements should be made concerning inter- 
state corporations, so that the residence of the share-holders 
or bond-holders would be immaterial, and arrangements 
made so that taxation of property in one state would not 
be duplicated in another. By some process of this kind, 
possibly there might be a rational system for the taxation 
of corporations ; but even that will be found inadequate. 

Single Tax. 

To get rid of the confusion of taxation with all of its 
irregularity and waste, many people have advocated a 
single tax on land values. This has many advantages : In 
its simplicity, — the land is always in sight and it can be 



496 ECONOMICS. 

easily assessed; second, a tax on the economic income of 
land cannot be shifted. The taxes would be taken off all 
improvements and personal property, which would give 
an impetus to all industries, would develop the soil, and 
would have a tendency to bring into use all vacant land. 
This in the long run would increase the value of all other 
business. 

But the defects of the system are evident in the fact that 
no single tax on any form of property is sufficient to 
meet the variety of forms of property existing in modern 
times. Hence this tax cannot be advocated as a cure-all 
for all the evils of taxation. 

The irregularities of the property tax, as seen in the 
assessment of real estate and also in the returns of personal 
property, insist that there must be a oliange in the former 
and an abolition of the latter. It is one of the discouraging 
features of our progress, that as soon as a man puts forth 
extra energy, endures special sacrifices to put in a form 
of machinery, to build a house for the protection of his 
home and family, adds stock to his farm, or new machinery 
for its better tillage, the assessor immediately appears 
upon the scene and rewards him for his improvement of 
the country by laying an extra burden of taxes upon him. 
Every one knows that the improved home, the improved 
machinery, and the large amount of stock on the farm, 
will not only bring benefits to the person who establishes 
it, but will lead to a largely increased social benefit. In 
coming to the point of a rational system of taxation, we 
must insist — first, that it shall be simple; second, that 
it shall be so arranged as to reach the entire tax-paying 
capacity of the individuals of the community. 



ECONOMICS. 



497 



Land and Income Tax. 

Perhaps the simplest method of reaching the taxing 
capacity of a community is in a combination of the land 
and income taxes, — the assessment of land at its full valua- 
tion on what is determined by its economic rent, or as is 
commonly knoAvn, a tax on land values. It is simply an 
estimation of the value of land sho"\vn by the income over 
and above the cost of production. Let this assessment be 
carefully made. Exempt all personal property and goods 
from taxation, and then place a tax on incomes from what- 
soever source, except that of land, and all forms of prop- 
erty will be reached. In the taxation of incomes a careful 
classification of the income, from whatever source, should 
be made, and the tax should be graded so as to meet all 
forms of income according to sources. Thus, a classifica- 
tion of salaries, of incomes from manufacturing, merchan- 
dising, stocks and bonds, etc., should be made. 

As before noticed, we have in combination two forms 
of taxation, — one the easiest to assess and collect, and the 
other the most difficult. But when reduced to a system, 
the income tax could be more readily collected than the 
present general-property tax, excepting the tax on land. 
The great difficulty with the income tax as levied in the 
United States is, that it has been in addition to other 
forms of taxation, which has led to a seeming injustice. 
This form of land and income taxation has been success- 
fully used in ^ew Zealand, and in the first year of its 
trial the same amount of revenue was raised as had for- 
merly been raised with the various methods employed, and 
with greater justice than previously. 



498 



ECONOMICS. 



Inequitable Assessment. 

Witli this method we should lose all of the inequality 
of assessment which now pertains to the personal-property 
tax. We also should be obliged to enforce an equity of as- 
sessment of real estate which does not now exist. Though 
land is in sight, there exists the greatest inequality of 
assessment and taxation. 

The first principle of reform should be to insist that 
land should be taxed at its full market value, or with a ref- 
erence to the economic rent of such properties and with 
the elimination of the element of improvements, and thus 
assessment could be more readily determined than is usu- 
ally supposed. As soon as we depart from the actual 
value of property as a basis of taxation, we begin to de- 
velop irregularity and injustice in assessment. 

Thus, for example, in the assessment in Kansas in 1896, 
in Cowley county, real estate was assessed at 25 per cent, 
of its real market value; in Johnson county, 40 to 50 per 
cent. ; in McPherson county, 40 per cent. ; in Reno 
county, from 26 to 33 1-3 per cent. In Ottawa county, 
land was placed at from one dollar to one dollar and 
twenty-five cents per acre, and other property at one-fourth 
value. In Dickinson county, real estate was assessed at 
25 per cent, of its actual value; in Saline county, land 
was 33 1-3 per cent, of its actual value. But this irregu- 
larity was found more noticeable on property not in land. 
Thus, in Dickinson county corn was assessed at 18 cents 
per bushel, in Geary 6 cents, in Morris 5 cents, in Ottawa 
8 cents, in Wilson 15 cents, in Reno, 4 cents, and in John- 
son 10 cents. Wheat was assessed at 45 cents per bushel 
in Wilson county, 15 cents in Osborne, 10 cents in Ottawa, 



ECONOMICS. 499 

50 cents in Dickinson, 60 cents in Sumner, 40 cents in 
Marshall, and 20 cents in Douglas. Thus there was a 
variation in the value of corn of from 4 to 24 cents per 
bushel, in wheat from 10 to 60 cents ; also a variation in 
the value of the cows from $7 to $25 in different counties. 
This variation was not regulated according to distance 
from the market and cost of transportation. Each county 
board of assessors had a different estimate on values and 
a different method of scheduling property. These irregu- 
larities exist in nearly every state in the Union, and before 
a rational system of taxation can be put in practice a 
uniform and equitable plan must be adopted and carried 
out. 

Methods of Collection. 

One of the prime methods of economy in a financial 
system is to have taxes regularly collected. Although not 
so difficult as the assessment, it is essential that the collec- 
tion of taxes should conform to business methods. In the 
case of the income tax, should it ever be instituted as a 
state institution, its collection should be arranged so as 
to cause no extra expense. Taxes should be paid directly 
into the hands of the county treasurer for all purposes, and 
this treasurer should be custodian of all funds, state, 
county, district or township, except certain funds col- 
lected on account of the state, which should be paid over 
into the state treasury. 

One of the defects of the tariff is, that it is difficult to 
collect the tax. Our custom-houses have been among the 
most difficult agencies to maintain in the United States. 
Nor is that all. Wlien the tax has been properly collected 
at a great expense, the consumer must pay it at an in- 



500 ECONOMICS. 

creased expenditure. This makes it difficult to insure 
justice. The old system of collecting taxes by sending 
to the individual an agent who received a commission for 
his services, has been largely dispensed with. 

Public Expenditures. 

Usually the expenditures from the public treasury are 
classified into those that go to the support of the govern- 
ment and those paid directly to individuals. By the sup- 
port of the government is meant not only the payments for 
the running of the government machinery, such as the sal- 
aries of certain officers and the expenses of their offices, 
but also those funds that are paid out for the general 
welfare of the community, irrespective of any persons or 
classes of people. The other group of expenditures is rep- 
resented in such as is dispensed for charity, pensions, and 
individual benefits. This classification, however, is not 
wis«, if we wish to grasp the full meaning of government. 

We find that there are certain functions of the state 
essential to its maintenance. Among these are the keeping 
of order and the protection of property and persons; all 
regulations concerning the possession, transmission, and 
exchange of property; the definition and punishment of 
crime ; the establishment of contract rights ; the adminis- 
tration of justice; the definition of political duties and 
privileges; the determination of the relations of citizens; 
the maintenance of the autonomy of the state in dealing 
with foreign powers. Without these functions a state can- 
not be said to exist, for it is in the administration of these 
that a people is entitled to the right to be called a state. 
The minimum of expenditures for a state or government 



ECONOMICS, 501 

must be in providing for and carrying out these principles 
of government. 

Starting from this point, a government may add any- 
thing which the majority determines shall be for the gen- 
eral welfare. There is no limit to the powers of a state 
controlled by the law of the people, except what the ma- 
jority cannot do, — that is, the impossible in government. 
Among optional duties and services of government may 
be named the following : Education ; care of the poor and 
incapable ; regulation of labor ; maintenance of systems of 
transportation and communication, such as railroads and 
postal and telegraph systems; the manufacture and distri- 
bution of public utilities, such as water, gas, etc. ; the 
regulation of industries and trade; improvement of san- 
itation ; cultivation of forests and land ; care of fish in 
rivers; and finally, the regulation of the consumption of 
food and drink. As there is practically no limit to what 
a state may vote to do for the people, there can be no 
limit to their expenditures ; therefore it is wisely provided 
that all expenditures shall be determined by the repre- 
sentatives of the people. 

Sometimes charities have been classified as personal ex- 
penditures. It is true that the expenditures apply to cer- 
tain persons, but it is for the benefit of the public. Edu- 
cation applies to certain persons, but it is for the benefit 
of the public at large. While we establish practically free 
education, the limitations of individuals are such that 
many are deprived of exercising the privilege. While we 
vote funds to help the poor, insane, and blind, it is merely 
as a public function and not as a charity. The state is 
—31 



602 ECONOMICS. 

merely seeking to preserve itself in the care of these indi- 
viduals. The same may be said v^ith regard to the ex- 
penditures for penal institutions. While we may attempt 
to reform criminals, it is not so much for the benefit of 
the individuals as for the state at large. As far as the 
state itself is concerned, it has no right to expend any- 
thing for individuals. Its final aim must be its own pres- 
ervation and the welfare of the public at large. 

The expenditures for pensions cannot be considered a 
charity. That is, were there nothing else involved in it 
than the bare help of individuals, the state would have no 
right to grant pensions. But it is as a method of paying 
those who will risk their lives for a state, that pen- 
sions are granted. While they appear to be given to a 
certain class, it is done for the purpose of future defense 
and welfare. Soldiers who take their lives in their hands 
to fight the battles of their country receive purposely a 
very small pay, inadequate for the time of service. Hence 
it is that the pension is nothing more than a supplementary 
pay to those who sacrifice most in the service. Therefore, 
when wisely administered, the pension system is valuable 
for the preservation of government and the perpetuation of 
liberty. The amount is only limited by the judicial ex- 
penditure for the welfare of the community. 

The chief thing to be observed in government expendi- 
ture is economy. A thousand things might be presented 
which in theory might be a benefit to the people, but the 
good returning from the expenditure would not be equiva- 
lent to the money expended with interest on the same, — 
and this should be the basis of all expenditure. Legis- 



ECONOMICS. 503 

lators and officers seldom realize that the money taken 
from the pockets of the people to be expended by the gov- 
ernment should yield a return equivalent to the amount 
collected plus the interest on the same at an ordinary rate 
of interest. The calculation, then, of the social, commer- 
cial and moral good to a community — in other words, the 
calculation of the amount of well-being to be gained by any 
expenditure — must be made by all officers. Well-inten- 
tioned people see things that would be an improvement 
to the community, and therefore advocate the appropria- 
tion of funds for this service, when in reality the good 
derived will in no way be equivalent to the amount of the 
expenditure. Here as elsewhere, good business consists 
in keeping down unnecessary and unwise expenses. In 
ordinary business, many people fail because of spend- 
ing their entire energy to the increase of income. A large 
proportion of it ought to be spent in keeping down ex- 
penses. It will be found that the prime principle of busi- 
ness success consists in the economy of the wealth at com- 
mand, and these principles should extend to all public 
expenditures. 

The Budget. 

Economy then is very essential in making up the budget 
of expenditures for every county, state, or government. 
jSTo doubt if everything was included in the items of ex- 
penditure that are proposed every year by some legislators 
in the United States, our expenditures would be increased 
a hundred fold, sufficient to bankrupt the state in a year 
or two. And nearly every one of these propositions for 
the expenditure of money would be of more or less benefit 
to the community. But the principle would be violated 



604 ECONOMICS. 

that the return for the expenditure should be equivalent to 
the expenditure plus the interest. In making up the 
budget of the various states and of the nation, many things 
are included which cannot be included in the category of 
wise expenditure. Hence it is that in making up the 
budget of expenditures, especial care should be taken to 
include in it only those expenditures which shall be pro- 
ductive of general good to the people. In private business, 
people limit their expenditures by the supposed amount on 
hand. In public expenditures, they estimate the needs of 
legitimate government and levy accordingly upon the peo- 
ple for payment. The principle of public expenditure, 
then, must be guarded with more care and wisdom than 
that of private business. 

Public Debts. 

That expenditures shall not become a burden to the 
people, it has become customary to borrow money and ex- 
tend payment over a series of years. It is done on the 
principle that certain improvements cannot be carried on a 
little at a time, year after year, and paid for in taxes by 
the people, so well as to be completed at once and give 
the people the use of iJie improvement while they are pay- 
ing for it. It i& wrong to entail upon a single generation 
all the expenses of public improvements, sometimes desira- 
ble and necessary in a single year. On the other hand, 
the public debts should not be increased so as to impose 
an excessive burden upon future generations. While the 
principle of public debt is a good one, it should be guarded 
very carefully or it may accumulate a burden upon the 
nation which eventually will lead to its destruction. Each 



ECONOMICS. 505 

generation will liave its own peculiar burdens to bear, 
and while it may be helped and given power to act by the 
improvements made by the preceding generations, these 
improvements should not be so great as to heap upon suc- 
ceeding generations such a burden as will prevent them 
from taking advantage of the necessary improvements of 
their own times. 

The public debts of the nations of the world have become 
very great. Taking the national, state and municipal in- 
debtedness, the amount of debt is appalling. ^Vhen this 
expenditure has been for the improvement of the nation 
in giving it power and facility in the creation of wealth 
and the elevation of the standard of life, there can be 
no cause for alarm. When such debts have been heaped 
up by fruitless wars and excessive armament, there must 
be cause for anxiety, though not for alarm. An estimate 
of 1882 made the public debts of the principal nations of 
the world amount to about twenty-seven billions of dollars. 

If a modern city proposes to give its people the benefits 
and privileges of a modern government in regard to parks, 
boulevards, streets, sidewalks, water-works, sanitation, and 
police system, there must be an enormous expenditure, 
which ought to be distributed over a period of years in 
order not to make taxation become a burden to industry. 
If a city must build a public hall in a given year, it is 
easy to see that the payment of it, if raised in a single 
year's levy in addition to all the other expenditures, would 
be an excessive burden to the people. There is only one 
way, and that is to distribute it. 



506 ECONOMICS. 

Imperfections of Government Machinery. 

There is much loss in the assessment, collection and ex- 
penditure of public revenue, on account of the imperfec- 
tions of government machinery. At best, a method of 
raising revenue and managing expenditures is expensive, 
but when Americans mix their politics and their public 
business in such a way as to destroy the best principles 
of government financiering, they heap upon themselves 
needless burdens. Every year, men are chosen for office 
with no especial adaptability for the office except that they 
have gained favor in serving some political party or are 
friends to those in power. Then, after they have spent two 
or three years in learning how to be good financiers, we 
turn them out of office and put other ignoramuses in their 
places in order to educate them in their specialty. We 
shall succeed in public financiering just in proportion as 
we cease to mix public business and politics in the adminis- 
tration of affairs of state, l^or is incompetency our only 
fault. For, while government officials in the United States 
as a whole are honest, there are those who seek public pre- 
ferment for the sole purpose of exploitation of the govern- 
ment. The political conscience respecting duties to the 
government, which is in other words duty to the public 
and the people, seems to be somewhat warped. 

It is not, then, the amount of money collected from a 
given people that should be any cause of worry to them. 
It is the question of whether they receive ample return 
for its expenditure in the general well-being of the com- 
munity. Therefore, in the assessment of taxes, in the 
collection thereof, in their expenditures, in the needs of 



ECONOMICS. 



507 



government, and in the perfection of government machin- 
ery, there needs to be exercised great wisdom on the part 
of the sovereign people. 

References : Taxation — Ely, E. T., Taxation of American States 
and Cities ; Cossa, L., Principles of Taxation ; Cooley, Thos., Tax- 
ation ; Seligman, E. R. A., Essays on Taxation. Finance — Adams, 
H.O., Finance; Adams, H. C, Public Debts; Bastable, C. F., Pub- 
lic Finance ; Plehn, Carl, Introduction to Public Finance. 



BOOK V. 



METHODS OF ECONOMIC INVESTIGATION. 



(509) 



CHAPTER I. 

THE FIELD OF INVESTIGATION. 

The study of economics cannot in any way be complete 
to the modern scholar without a careful investigation of 
the actual economic conditions. Sometimes this part of 
political economy is called practical economics as distin- 
guished from the theoretical. In reality it cannot be con- 
sidered any more practical than a study of the principles 
of economics, for the whole object of economic investiga- 
tion is to reveal economic principles in the actual condi- 
tions of life. The whole object of j^olitical economy is to 
study economic life, for the ultimate object of its im- 
provement. As investigation without understanding the 
principles would be of no avail, so principles without their 
application would not fulfill their mission. In a philo- 
sophic sense neither is more practical. The object of in- 
vestigation, then, is to discover new truths. In a univer- 
sity a double object appears: first, the discovery of the 
truth ; and second, the training of students in methods of 
investigation. 

The Library. 

The first consideration is the library. The first phase of 
economic investigation is found in ascertaining and under- 
standing what others have done before by way of collecting 
economic statistics or developing economic principles. The 
library is, therefore, a part of the field to be occupied by the 

investigator. While a person may enter the field of inves- 

(511) 



512 



ECONOMICS. 



tigation on his own account, regardless of what others have 
done, it will be to a large extent a waste of time and energy, 
for it might take a year to discover by actual observation 
what may be obtained in a few days in the library in con- 
sidering the results of investigations of others. In library 
investigation there is something more to be considered than 
the mere fact of learning what others have done. Xew 
questions are arising continually in the subject of eco- 
nomics, which must be traced out by a careful compari- 
son of all material bearing directly or indirectly upon the 
subject, and a logical conclusion reached. This requires 
a careful understanding of all the material collected on 

the subject. 

Classification of Library Material. 

References and discussions of the subject in hand will 
be found in newspapers, magazines, volumes and docu- 
ments throughout the library, which must all be noted, 
collected and weighed before using. It is essential, in the 
study of these sources, to make a proper classification of 
all material. There are to be considered first sources, or 
what might be called original sources. These include doc- 
uments, written or compiled by actual observers of the 
process of the subjects in hand, based upon the actual facts 
in the case. iNText to these sources may be counted au- 
thorities, written by masters of the science, who in using 
and interpreting original sources have laid down funda- 
mental principles which are considered conclusive. There 
are a large number of secondary writings sent out largely 
for the purpose of propaganda, or to emphasize certain 
notions. These may be essays, magazine articles, and 
newspapers. Of magazines, those that are especially de- 



ECONOMICS. 513 

voted to some scientific subject contain a large amount 
of reliable scientific knowledge, which may pass into either 
the classification of sources or of authorities. But a 
large portion of that which the individual finds in print 
will be of little practical value except as sketches of the 
actual conditions of the subject under investigation. 
Therefore, the student who enters the library for investi- 
gation must have a careful knowledge of the use of the 
library, and make a great study of the collection, classi- 
fication and handling of the material there, or his investi- 
gation will be in vain. 

Field "Work. 
While the library may be considered the foundation of 
the laboratory method, the work should be extended into 
actual life. A person would scarcely be called an economist 
of the first order who had not inquired on his own account 
into the conditions of labor and capital, trade and indus- 
try, interest, profits and rents, and in fact all the eco- 
nomic conditions of life around him. This is by far more 
difficult than the library investigation, for the reliability 
of sources is not evident. To enter a laboring camp to 
inquire into the relation of employer and employe, the 
rate of wages, standard of life, requires a different kind of 
ability from that required in library research. To in- 
vestigate the conditions of capitalistic enterprise, to de- 
termine the cost of production, the market, the laws of 
supply and demand in actual operation, is by far more 
difficult than taking records from printed pages, but it 
will yield larger returns in vitalizing the library pro- 
cesses. It helps one to realize the nature of economic law 



514 ECONOMICS. 

and the scope of economic principles. It changes the 
economist from a mere philosopher into a scientist. It 
is true that the investigator should not fail to avail him- 
self of such general statistics as may be published from 
time to time on the subject of his investigation, nor should 
he neglect any particular statistical work or information 
ascertained in the specific field being investigated. In 
the United States we have a census every ten years; 
the annual publications of the JSTational Bureau of Labor 
Statistics ; the annual publications of the agricultural and 
educational departments ; the publications of the Interstate 
Commerce Commission ; as well as the various publications 
of the several states on labor statistics, railroads, agri- 
culture, and education. These are among the chief per- 
manent statistical sources in America. To be added to 
these are scores of lesser reports and special documents 
which render the field tolerably complete. Nor should 
there be omitted from this category the public documents 
of Congress, and the various state legislatures and execu- 
tive departments, as well as the reports of investigations 
carried on by the different universities. 

Historical Investigation. 

While the determination of the conditions of the pres- 
ent and the probability of the future are the chief aims of 
the economic science, the historical field should not be ig- 
nored. While it is not essential to the economist that he be 
perpetually delving into the principles of Adam Smith and 
Ricardo, historical reviews of the development of economic 
science on the one hand and of industrial history on the 
other would have a tendency to verify the principles of po- 



ECONOMICS. 515 

litical economy and to strengthen all modern investigation. 
When anything is discovered in the field of modern science, 
the investigator should know at once whether it is some- 
thing new, or the recurrence of some old phenomenon in a 
different form. When he thinks he has arrived at a new 
principle he should know at once whether it has ever been 
advocated or presented by other writers or investigators. 
To this end, perhaps, industrial history is more important 
than the history of political economy, for it presents the 
various changes that have taken place in the development 
of the industries of the country ; it gives in detailed form 
the actual wealth production of various kinds, and outlines 
the manner in which this has changed from century to 
century. This cannot but add strength to the inves- 
tigator. While there may be no direct connection or 
similarity between the corporations of Queen Elizabeth's 
time and the modern corporation, there will be brought 
to light by a careful study of the former certain conditions 
of life which will aid in the proper handling of the latter. 

Scope of Economic InTestigatioii. 

The economic investigator is limited in his scope only 
by the relations of wealth production of man. Any phase 
of economic life may be considered as a part of his field. 
He should, however, draw a sharp distinction between 
actual social conditions and economic relations. All forms 
of production, whether of the raw material or of the fin- 
ished product; all forms of exchange, whether foreign or 
domestic ; all methods of transportation ; everything relat- 
ing to labor and wages, capital and interest, land and rent, 
is plainly within the field of the economic investigator. 



516 ECONOMICS. 

Every phase of economic organization, including the firm, 
the corporation, the trust and monopoly, and labor organi- 
zations, as well as the organization of industry, are worthy 
of consideration. The producers and consumers should be 
the subject of careful investigation, the chief aim being the 
verification of economic principles, the vitalization of eco- 
nomic philosophy and the modification of economic laws 
by actual practice and business, and the discovery of a 
new law or the determination of the old law imder a new 
form. Such, then, should be the scope of economic inves- 
tigation. Wherever man appears in his wealth-getting and 
wealth-using capacity, there should go the investigator. 



ECONOMICS. 617 



CHAPTER 11. 

THE MODE OF PROCEDURE. 

The Economic Purpose. 
In any investigation the purpose must be clearly defined. 
Many reports liave been published which are practically 
useless because there has been no well-defined purpose in 
the investigation. A great mass of unclassified material 
has been presented, in which the vital points are omitted. 
Attempt as you will to determine any particular proposi- 
tion, the real information desired is lacking. The indi- 
vidual must start out with a clearly defined notion of what 
he is to ascertain, and he must collect the material which 
will best present it. In the consideration of the labor 
question, for instance, it may be desirable to give a com- 
plete review of the entire subject, regardless of any well- 
defined object to be gained, except a general understand- 
ing of it in all its scope and details. But a better kind of 
investigation is that which seeks to determine some phase 
of labor, such as the rise or fall in the rate of wages in a 
given period or in a given industry; or perhaps the rise 
and fall of the rate of transportation of a given railroad 
or a given set of railroads ; or, to narrow it even more, the 
rise or fall in the rates on cattle or wheat or any other prod- 
uct whatever within a given period. When the end sought 
is once determined upon, all material should be gathered 

and classified in reference to this. 
—32 



518 ECONOMICS. 

Gathering Material. 
The actual records of procedure from day to day, from 
month to month, from year to year, must be determined. 
If these have been collected and summarized for him, the 
work of the investigator is comparatively easy, provided 
that a uniform system of account-keeping be practiced. 
And yet a score of questions will arise in the outset in deter- 
mining the material to be collected, and the method of pro- 
cedure. Thus, if the rate of wages is considered, it will be 
necessary at once to determine who are wage-earners. Will 
the salaries of persons receiving one hundred dollars per 
month be called wages ? If not, will salaries of people re- 
ceiving twenty dollars per month be called wages or will 
wages be limited by what has been determined in the courts, 
the daily earnings of ordinary physical labor ? If so, how 
much mental capacity will one be allowed to use in ordi- 
nary physical labor ? The fact is, that no labor is con- 
ducted without greater or less mental effort; but where 
shall the line be drawn between mental labor and physical 
labor ? Then, in the rates of wages it will be necessary, in 
order to reach any determination, to consider not only the 
average normal daily wage, bu't the number of days em- 
ployed throughout the year. How will this be ascertained ? 
Will a person go to the pay-roll of a given firm ? It will 
show that certain persons were employed so many days. 
It will not show what they did the remainder of the time. 
Will you find out the individual laborer and ask him how 
many days he has been idle or what his average wages have 
been ? Outside of a general notion, he cannot tell you, 
because he keeps no account. Thus it is, that the more 
specific one attempts to become, the more difficulties arise 



ECONOMICS. 619 

in scientific exactness. Suppose all the firms kept a strict 
account of everything : even then the work of the investiga- 
tor is not light, for each one would keep his accounts in 
his own way. Before anything could be done they must 
be reduced to a common basis of measurements, which 
reduction might be quite impossible in certain cases. Be- 
fore anything of value can be done, a classification of all 
topics discussed, on proper blanks prepared for the purpose, 
will be necessary. 

The purpose having been clearly defined, it will not be 
difficult to arrange the material under different topics. 
Under each subhead should be classified the material as 
gathered. Great pains should be taken in regard to exact- 
ness of the details, otherwise the result will be too inexacc 
for use. Owing to the irregularities which one finds in 
the actual economic conditions, only a reasonable degree 
of probability can be ascertained through any statistical 
determination ; and if carelessness prevails in the collec- 
tion of these facts, the degree of probability is so far re- 
moved from the exact conclusion as to be practically worth- 
less. If one has to work in the library, a complete outline 
of the subject should be made, by which one w^ould proceed 
from step to step to the conclusion sought. Great care 
should be taken in the arrangement of this outline to ex- 
clude all irrelevant matter. Yet in reading one should 
beware not to carry this process of exclusion too far, other- 
wise the investigator will make a wrong interpretation 
and use of what has been clearly stated. To take a para- 
graph out of the order of the chapter without reference to 
the remaining portion might lead to a wrong use of its con- 



620 ECONOMICS. 

tents in establishing any given proposition; therefore, it 
is quite necessary, for the proper interpretation of authors, 
writers, or library material, to read widely enough to grasp 
the whole matter. 

In making the outline one should consider very care- 
fully the various references under each subject. Before 
one has gone very far on the way as an investigator, he 
must know the general scope of the subject and the material 
with which he has to deal. Therefore, attached to the 
general outline should be a system of references of classi- 
fied material. It is indispensable, also, to have a system 
of recording and general note-taking. Perhaps the card 
system is the most convenient of all. A series of cards 
arranged alphabetically and in different classes for the 
purpose of recording and classifying material, should be 
arranged. Class A should be sources, either library work 
or actual observation; Class B, authorities; Class C, sec- 
ondary material, etc. On each card should be recorded the 
title and the nature of the contents of the book or manu- 
script. A system of note-taking is best arranged by the 
card system, for in any statistical investigation, whether 
carried on in the library or in actual field work, it is not 
possible for the investigator to carry in his mind all the 
details of the investigation. He desired to take notes from 
observation or from reading. In case of a systematic in- 
vestigation the blank when filled will represent a logical 
method of note-taking ; but even in this case supplementary 
notes may be necessary. In case of library investigation, 
notes are usually of two kinds: First, a direct quotation 
of important statements or statistics ; second, a summari- 



ECONOMICS. 621 

zation of book, page or chapter in the investigator's lan- 
guage. Great care should be taken in both cases to attach 
to the note the exact references of the location of the quo- 
tation or statement, giving book, chapter, titles, pag-e, etc. 
Excessive care is necessary to make the quotation exact, 
but even greater care is necessary that the investigator 
understand the author, and that he draw the proper con- 
clusion in his own language. Investigators frequently 
deceive themselves and others from lack of proper inter- 
pretation of writings or representation of facts. There- 
fore the utmost care in discernment and representation is 

necessary. 

Accounting and Comparing. 

Enumeration is not easy, at best, for it is difficult to de- 
termine first the article to be enumerated. If a basket con- 
tainirc, oranges, apples, watermelons, cantaloupes, turnips 
and peaches should be presented to a child, and he were 
asked to count the number of pieces of fruit in the basket, 
he would be somewhat puzzled as to what should be called 
fruit and what vegetable — the difiiculty of determining 
a unit of counting. Ask the pupils to count the number 
of pieces of chalk in the blackboard receptacle, and they 
may have a very difficult task of what seems a very simple 
matter, — for there are all sizes, from the full crayon to the 
minutest particle* of dust. What constitutes a piece of 
chalk must be determined before they can proceed. ISTearly 
all the difficulty in economic theory arises from this very 
point of the definition of terms, — merely the fact of count- 
ing. Authors use such terms as profits, interest, rent, and 
wages, in different senses, and therefore reach different 



622 ECONOMICS. 

conclusions. The scope and meaning of tlie term used are 
not the same in the minds of different individuals, there- 
fore controversy as to conclusions arises. The same idea 
prevails in the gathering of statistics. The counting must 
be a process of definition and exclusion. The difficulty in 
field work is that of observation. This must be carried on 
with great accurateness or the facts in the case will not be 
recorded. To take in all the conditions that may arise and 
use only the data necessary for reaching the conclusion, 
requires practice and skill. In the first place, economics 
treats cff the relation of man to wealth, and the economist 
must touch upon human nature, which is a variable quan- 
tity. The geologist dealing with rocks without life, the 
chemist with organic and inorganic matter, the biologist 
with life under his control, have more or less permanency 
in the material on which they operate ; while the economist 
must operate upon material with its own individual activ- 
ity. In other words, the laborer may refuse to disclose his 
condition or the capitalist the nature of his business. More 
than this, owing to the variability of human nature, when 
an honest attempt is made to reach a conclusion the condi- 
tion and nature of the mind will render this more or less 
uncertain. Hence, in all economic investigations compar- 
ison is absolutely necessary in order to determine the rela- 
tive value of information. This comparison should be 
carefully observed in all material, and every bit of infor^ 
mation should be considered as to its degree of accuracy, 
modified more or less by detracting influences. 

Examples of Methods of Investigation. 
A few examples of methods of investigation are here 
given, merely for the purpose of suggestion. They are not 



ECONOMICS. 523 

in themselves models, but rather suggestions of methods of 
procedure; for all methods of procedure must vary more 
or less, according to the conditions under which individuals 
work. The first one, on labor, is an outline for a general 
discussion of the subject, including the work in the library 
and actual investigation in the field. It is rather suggest- 
ive to beginners who desire to make a prolonged investiga- 
tion of the subject. Some of these outlines were orig- 
inally made by students in economics in the University 
of Kansas, under the direction of the ■svriter. Those 
on railroads represent various phases of general topics, 
and were made through the study of the legal and 
economic aspect as reported in statistical reports, laws, and 
decisions of the courts. Those regarding packing-house 
employes and cooperation in England and the Pullman 
strike were made from actual observation. There is no 
uniformity of representation, for the reason that it is better 
that methods should be suggestive rather than ideal, as 
better results can be obtained from student investigators. 
Scores of subjects could be obtained in the economic field 
for investigation; and as students become more scientific 
and better opportunities are offered for investigation, a 
single sub-topic under these broad generalizations may be 
sufficient for investigation. 

Example 1. The Labor Question. An economic investigation to 
determine the relations of labor to capital. (This is an example of 
covering a large field to determine general results. While it is 
excellent for general knowledge, it is not as profitable as a small 
subject thoroughly worked out for specific results.) 
A. Wages. 

1. The origin of the wage system. 



524 



ECONOMICS. 



2. Laws of wages. 

(a) Scientific law of wages. 

(b) Iron law of wages. 

(c) "Wage-fund theory. 

3. The relation of labor-income (wages) to other branches of in- 

dustry, 

(a) Eelation of wages to capital-income. 

(b) Relation of wages to net product of labor. 

(c) Relation of real wages to nominal wages. 

4. Influences upon wages. 

(a) The sliding scale of wages. 

(b) The tariff. 

(c) The eight-hour law. 

(d) Trusts and monopolies. 

(e) Free land. 

(/) Improved machinery, 

5. Proposed abolition of the wage system. 

B. Labor organization. 

1, Origin and growth of organizations, 

2, Classification of labor organizations, 

3, Aims of labor organization, 

4, Influence of organizations upon their members. 

5, Relation of organizations to strikes. 

6, Relation of organizations to production. 

7, Relation of organizations to wages. 

8, Relation of organizations to politics in the United States. 

9, Tendency towards universal organization. 

10. "Weakness of organizations. 

11. Needs of organizations. 

C. Conflicts between labor and capital. 

1. Statistics of strikes and lockouts. 

2. The moral effect of conflicts of labor and capital. 

3. The effect on wages, 

4. Convict labor — a cause. 

(a) Four systems — lease, piece, public, and contract. 

5. Methods of conciliation. 

(a) Private agreement on a wage scale. 
(6) Arbitration. 

i. Compulsory, 

ii. Voluntary. 

6. Cost of controversies. 



ECONOMICS. 625 

7. Importance of unity in civilization. 
D. The settlement of the labor problem. 

1. By improved conditions of labor: 

(a) In respect to — 
i. Health, 
ii. Education, 
iii. Morals, 
iv. Social relations. 
V. Economic condition. 
(6) To be accompanied by legislation. 
i. To make laws for — 

Protection of life. 

Security of wages. 

Settlement of disputes. 

Eestricting employment of women and children 

Limiting hours of a day's work. 

Eegulating labor contracts. 

Regulating trusts and monopolies. 
ii. To create commissions to enforce laws, 
iii. To restrict immigration. 

2. By better organization of industry by means of — 

(a) Cooperation. 
(&) Profit-sharing. 

(c) State regulation. 

(d) State ownership. 

BIBLIOGRAPHY. 

Adams — The Prevention of Railroad Strikes. (Annual Report 

Commissioner of Labor, 25, 1896.) 
Bagehot — The Transferability of Labor. 
Baker — Labor and "Wages. 
Baring-Gould — Labor Question in Germany. 
Barnes — Plain Questions and Practical Answers. 
Bains — Labor Problem. 
Bains — Trade Unions and Arbitrations. 
Booth — Labor and Life of the People of London. 
Brassey — Work and Wages. 

Brentano — The Relation of Labor to the Law of To-day. 
Brentano — History and Development of Guilds and Origin of 

Trade Unions. 

Brown — Studies in Modern Socialism and Labor. 

Bureau of Labor Statistics of Missouri — History of Great Strikes. 



526 ECONOMICS. 

Channing — Evolution of the Working ClasseB. 

Cook — Natural and Starvation Wages. 

Cook — Are Trade Unions a Nursery of Socialism ? 

Clark — The Modern Distributive Processes. 

Clark — Labor in its Relation to Wealth. 

Clark — Possibility of a Scientific Law of Wages. 

Clark— Wages as Affected by Combinations. 

Cummings — Actions Under the Labor Arbitration Act. 

Ooglay — Laws of Strikes, Lockouts, and Labor Organizations. 

Donisthorpe — The Labor Question. 

Dyer — The Evolution of Industry. 

Eliot — Addresses to Workingmen by Felix Holt. 

Ely — The Labor Movement in America. 

Engels — Condition of the Working Classes in England. 

George — The Condition of Labor. 

Gibbens — Industrial History of England. 

Gilman — Profit-Sharing. 

Giffen — Progress of the Working Classes. 

Gladden — The Regulation of Industry. 

Gladden — Working- People and Their Employers. 

Gould — Housing of the Working-People. 

Gunton — Evolution of the Wage System. 

Gunton — Wealth and Progress. 

Hamerton — Custom and Tradition. 

Harrison — Three Typical Workingmen. 

Holt — Addresses to the Workingmen. 

Holyoake — History of Cooperation in England. 

Howell — Conflicts of Labor and Capital. 

Howell— Trade Unions; New and Old. 

Hoyt — History of Immigration. 

Jevons — Questions of Labor and Capital. 

Jevons — The State in Relation to Labor. 

Jevons — Trade Societies; their Object and Policy. 

Jevons — The Theory of Labor. 

Leo XIII, — Letter on the Conditions of Labor. 

Leslie — Movement of Agricultural Wages in Europe. 

Mallock — Labor and the Popular Welfare. 

McNeil — The Labor Movement. 

Merriweather — Factory Life. 

Mill — The Claims of Labor. 

Newcomb — A Plain Man's Talk on the Labor Question. 



ECONOMICS. 627 

Newton — A Bird's-eye View of the Labor Question. 

Newton — Is the Rate Just to the Workingman ? 

Phillips — Foundation of the Labor Movement. 

Phapem — Redemption of Labor. 

Phapem — "Wages . 

Parrett — Labor Movement in English Politics. 

Powers — Labor. 

Powderly — Thirty Years of Labor. 

Ral — Eight Hours for Work. 

Ricardo — Rent, Values and Profits. 

Rogers — Legislation on Labor, and its Effects. 

Rogers — Movements of Life Immigration. 

Rogers — Six Centuries of Work and Wages. 

Ryan — Arbitration Between Capital and Labor. 

Schaeffle — Theory and Policy of Labor Protection. 

Scharz — Honest Money and Labor. 

Seward — Chinese Immigration in the Social and Economic Aspects. 

Smith — Emigration and Immigration. 

Special Consular Reports, Vol. II, pp. 209-332. ( 1890.) 

Spyers — The Labor Question. 

Suteer — The Rights of Labor. 

Taussig — Wages and Capital. 

Thompson — Tyranny of Trade Unions. 

Trant — Trade Unions. 

Toynbee — Wages and Natural Law. 

Toynbee — Industrial Revolution, 

Willoughby — Child Labor. 

Young — Labor in Europe and America. 

Walker — The Wages Question. 

Walker — Effects on the Manual Laboring Class. 

Whittaker — Politics and Industry. 

AVood — Theory of Wages. 

Wright — Labor Laws in the United States. 

Wright — Strikes and Lockouts. 

Wright — Profit-Sharing. 

AVright — Distributive Cooperation in England. 

Wright — The Working-Girls of Our Large Cities. 

Example 2. Railroad Rates. An economic investigation to de- 
termine whether rates are decreasing more rapidly than expenses. 
I. Development of tariffs. 



628 ECONOMICS. 

A. Classification of freight. 

References: Eeport of Interstate Commerce Com., 1888, 
pp. 34-41 ; Hadley, Railroad Transportation, pp. 112, 113 ; 
11th Annual Report Interstate Commerce Commission, 
pp. 62-71. 

B. Discrimination, 

References : Stickney, Railway Problem, pp. 45-71, 154-161 ; 
Hadley, Railroad Transportation, pp. 100-125; Dixon, 
State Railroad Control, pp. 48-75; Kirkman, Rates and 
Government Control, pp. 67, 95, 97, 123, 127. Pop. Se, 
Mo., 28:424. 

C. Competition. 

References: Hadley, Railroad Transportation, pp. 63-99; 
Stickney, Railway Problem, pp. 58-71, 36-44; Kirkman, 
Railroad Rates. 

II. Theories of Rates. 

A. Cost of Service. 

References: Hadley, Railroad Transportation, pp. 108-9, 
261-5; Stickney, Railway Problem, pp. 45-6; Kirkman, 
Railroad Rates and Government Control, pp. 19, 74, 83, 
220. 

B. Value of the service on what the traffic will bear. 

References: Hadley, Railroad Transportation, pp. 16-7, 
110-1, 261-5 ; Kirkman, Railroad Rates and Government 
Control, pp. 13, 30-2, 43; Econ. Jr., 5:438, 7:317; An. 
Am. Acad., 3:102, 5:335, 11:324. 

III. State control or regulation of rates. 

A. By ownership of roads. 

References : Hadley, Railroad Transportation, pp. 203-258 ; 
Kirkman, Railroad Rates and Government Control, pp. 
219-231 ; Amer. Law Rev., 18:302. 

B. By legislative enactment. 

(a) Maximum rates. 

References: Hadley, pp. 129-134; Dixon, pp. 26-30; 
Kirkman, pp. 24, 40, 123. 
(6) Commissions. 

References: Hadley, pp. 135-141; Dixon, pp. 150-56, 
194-97 ; Larrabee, The Railroad Question, pp. 428-30, 
381; Amer. Econ. Assn. Pub., 6:477; Eng. Mag., 
9:623; Pol. Sc. Quart., 11:201. 
(c) Reasonable rates. 

References: Dixon, pp. 38^1; Larrabee, pp. 376-88, 
361, 365 ; Kirkman, pp. 14-15, 18, 45, 199 ; An. Amer. 
Acad. Pol. Sc. , 5 : 335 ; Nation , 66 : 260 ; Rev. of Rev. , 
17:402; Pub. Opinion, 24-330; Index Interst. Com. 
Com. Repts. 



ECONOMICS. 529 

IV. Present rates in the United States. 

A. Compared with rates of other countries. 

References: Hadley, p. 104; Larrabee, pp. 370-3. 

B. Compared with former rates. 

References: Hadley, pp. 104-8 ; Dixon, pp. 43-44; Larra- 
bee, 374-5, 417; Kirkman, pp. 27, 175; 8th An. Rept. of 
Statistics of R. R. in U. S., p. 142; Pop. Sc. Mo., 47: 186 ; 
Jr. Pol. Econ. , 6 : 457 ; An. Statistical Assn. , 6 : 115 ; Forum, 
18:250; Interstate Com. Com. Repts., 1898, p. 35; 1890, 
p. 70. 
V. Effect of pools. 

References: Larrabee, pp. 189-204; Kirkman, pp. 95-116, 
129-48 ; 11th An. Rept. Interstate Com. Com., pp. 48-51 ; 
Eng. Mag., 1:105; Forum, 20:519; Index Interstate 
Com. Com. Repts. 

Greneral suggestions for concrete investigation : Interview 
shippers and railroad oflRcials ; examine schedule of rates 
and railroad books. 

Example 3. Interstate Commerce Lata. An economic investiga- 
tion to determine the present state of such laws. 

I. History of the attempts of the states to regulate the business of 

carriers. 
References: Case of Munn v. 111., 94 U. S. 113; C. B. & Q. R. v. 
la., 94 U. S. 155; Peck v. Chicago and North Western R. R., 
94 U. S. 164; Wabash, St. Louis and Pacific R. R. v. 111., 118 
U. S. 557. 

II. Legal meaning of and liability of "common carrier." Any 

text on Bailment. 

III. Read the law carefully to discover — 

1. Its purpose and object. 

2. The means prescribed for accomplishing this object. 

3. Punishment for disobedience. 

4. To whom the act applies. 

5. Who are especially excepted from its operation. 

6. When is the common carrier excepted from its provisions ? 

7. What constitutes the commission. 

8. The qualifications of a commissioner. 

9. The powers of the commission. 

10. Who may make complaint before the commission. 

11. The efifect of the decision of the commission. 

BIBLIOGRAPHY. 

Alexander, E. P. — Railway Practice. 
Bonhon, J. M.— Railroad Secrecy and Trusts. 



630 ECONOMICS. 

Dabney, W. D. — The Public Regulation of Railways. 
Dixon, F. H. — State Railway Control. 
Dos Passos, John R. — The Interstate Commerce Act. 
Farrar, T. H.— The State in its Relation to Trade. Chaps. 8, 10, 12. 
Hadley, A. T. — Railway Transportation. 
Hole, James — Nationalization of Railways, Chaps. 1-4. 
Stickney, A. B. — The Railway Problem. 
Stickney — State Control of Trade and Commerce. 
H. T. Newcomb in N. Amer., Dec. 1898 — Opposition to Railway 
Pooling. 

Roswell Miller, in N. Amer., Dec. 1898— Decision against Railway 
Pooling. 

M. H. Smith, in N. Amer., April, 1898 — Railway Pooling vs. The 
Interstate Commerce Commission. 

Charles A. Pronty, in N. Amer,, Nov. 1898 — Powers of the Inter- 
state Commerce Commission. 

Chas. A. Pronty, in Forum, April, 1899 — Powers of Interstate 
Commerce Commission. 

A. F. Walker, in Forum, 17 : 207— The Interstate Commerce Law ; 
has it been Beneficial ? 

The Farmer and Railroad Legislation, Century, 21: 780. 

I. G. Rice, in Forum, 17 : 676 — Legalized Plunder of Railroad Prop- 
erty ; the Remedy. 

C. D. Wright, in Forum, 18:704 — Steps Toward Government Con- 
trol of Railroads. 

J. A. Latcha, in N. Amer., Aug. 1897 — Pooling Railway Earnings. 

H. F. Newcomb, in Pop. Sc. Mo., Oct. 1897— A Decade in Federal 
Regulation of Railways. 

G. R. Blanchard, in Forum, 23:385 — The Trans-Mississippi De- 
cision, 

Example 4. Railroad Accidents. An economic investigation to 
determine the cause of accidents, and by what means they may be 
minimized. 
A. Who are victimized in railroad accidents ? 

( Interstate Commerce Commission Reports, 1889-98 ; 
Bank. Mag., 53 : 827 ; Jr. Sc, 127 ; Am. Arch., 11 : 218.) 

I. Number killed and wounded annually. 

(a) Employes. 

(b) Passengers. 

(c) Trespassers and non-trespassers. 

II. Number by groups. 

(Interstate Commerce Commission Reports, 1889-1898.) 



ECONOMICS. 



531 



. How many kinds of accidents. 

( Interstate Commerce Commission Reports.) 

I. Accidents of the first class. 

1, Enumerated. 

(a) Coupling and uncoupling cars. 

(b) Falling from trains and engines. 

(c) Overhead obstructions. 

2. Number of individuals killed and injured in first class. 

II. Accidents of the second class. 

(a) Collisions — Rear end, head end, and side. 

(F. C. Adams, R. R. Accidents, pp. 61-2, 144-52, 265.) 

(b) Derailments. 

(Adams, pp. 13, 16, 23, 54, 79, 84, 118, 120.) 

(c) Number of individuals killed and injured, of each class 

of victims. 

III. Accidents of the third class. 

1. Enumerated. 

(a) Other train accidents. 
(6) At highway crossings. 

(Adams, pp. 165, 170, 244, 258.) 

(c) At stations. 

(Adams, p. 166.) 

(d) Other causes. 

2. Number killed and injured of each class of victims. 
What are the causes of railroad accidents ? 

(Adams, R.R. Accidents, pp. 12, 16, 67, 72, 82, 89, 100, 106, 111, 
117,265.) 
I. Patent causes. 

1. Overtaxed trainmen. 

(Recent R. R. Accidents, Pop. Sc. Mo., 44 : 314.) 

2. Rapid transportation. 

(Pop. Sc. Mo., 44: 314.) 

3. Lack of proper signal system. 

( Adams, p. 86.) 

4. Too dense traffic upon one track. 

(Pop. Sc. Mo., 44:314; No. Amer., 157:707.) 

5. Mistaken or missent train orders. 

( Adams, pp. 66, 69.) 

6. Unskilled employes. 

(a) Negligence. (Adams, p. 125; No. Amer., 157: 777.) 

(b) Mistakes of officers or servants. (Adams, p. 125; No. 

Amer., 157:707.) 



532 ECONOMICS. 

II. Latent causes. 

1. Defective machinery — track, wheels, axles, and couplings. 

2, Poorly constructed cars, track and bridges. 

( Adams, pp. 58, 117, 46, 98, 99, 107, 166, 206, 266.) 

D. What preventives of railroad accidents are there, and how 

many are available for use ? 
(Barry's K.R. Appliances ; Interstate Commerce Commis- 
sion; Adams, pp. 19-70; Pub. Opinion, 2:273.) 

I. Automatic oar-couplers — a necessity. 
(Cong. Record, 52d Cong., Vol. 24, Part 3.) 

II. Automatic train brakes — a substitute for hand brakes. 
(Adams, pp. 21, 125, 190.) 

(a) Number in use, and result. 

III. Interlocking signal system. 

(Adams, pp. 97, 182, 192, 194-196; Barry's R. R. Appliances, 
p. 113; 2d Annual Report Mass. R. R. Com., p. 141.) 

IV. Block signal system. 
(Adams, pp. 43, 47, 51, 255.) 

E. Cost of accidents. 

(Adams, p. 267.) 
(a) Employers' liability acts. ( See statutes of various 
states.) 

Example 5. Canals and Their Relation to Railroads. An eco- 
nomio investigation to determine relative cheapness of transporta- 
tion by rail and by water. 

I. The history of canal building. 

Eclectic Eng., Vol. 10, p. 227. 

E. J. James — Am. Econ. Assn. Pub., Vol. V. 

II. The advantages of railroads over canals. 

1. Any locality may be reached. 

James— Niles Register, Apr. 30th, July 30th, 1825. 
E. H. Derby— Harper, Mar. 1880. 

2. The rate of travel is greater. 

E. J. James— Eclectic Eng., Vol. 21, p. 381. 

3. Capacity of railroads unlimited ; that of canals limited. 

L. M. Haupt— Amer. Ec. Assn. Pub., Vol. V. 
E. J. James. 

4. Canals limited by seasons of the year. 

E. J. James, 

5. No losses as in the case of absorption in canals. 

E. J. James. 



ECONOMICS. 533 

III. Advantages of canals. 

1. They develop the country. 

Eclectic Eng., Vol. 10, p. 227. 

2. They join water-ways. 

E. J. James. 

3. Cost of transportation by water is less than by rail. 

L. M. Haupt. 

4. Canals carry heavy traffic. 

E. J. James. 

5. Benefit railways. 

E. J. James. 

Example 6. Productive Cooperation in England. An economic 
investigation to determine the possibility of the success of pro- 
ductive cooperation. 

I. The present condition of cooperation. 

A. As shown by exhibition at Crystal Palace, Aug. 18-22, 1896. 

B. As learned by association with labor leaders of England. 

II. The failure (till 1870) of productive cooperation, but success of 

distributive cooperation. 
A. Due to greater difficulty of management. 

III. Review of success and failure of cooperation. 

A. The Rochdale Pioneers. (Successful productive enterprise.) 

1. The meager beginning. 

2. Present condition of the society ; membership, number 

of establishments, capital, annual business, profits. 

3. Effect upon country of establishing societies. 

B. The Labor Association. (1884.) 

1. Purpose — to form public opinion on the subject of asso- 

ciated labor. 

2. Means — lectures, publications, conferences, etc. 

C. Hebden Bridge Fustian Mfg. Cooperating Societies. 

1. Organized 1870. 

2. Poverty of association and members. 

3. Growth illustrated by table. 

IV. General methods existing among the societies. 

A. Division of profits with purchasers. 

B. Setting aside amounts for education, sick, etc. 

C. Establishment of stores. 

D. Division of gross profits. 

E. Management of society. 
—33 



634 ECONOMICS. 

v. Summary of growth of cooperation as shown by table. 
VI. Conclusion. 

A. Objects aimed at. 

(a) To benefit the laborer. 

(b) To benefit the employer. 

B. Beneficial effect of productive cooperation on society. 

Example 7. The Condition of the Packing-House Employes { in 
Armour Packing House, Kansas City, Mo.). An economic investi- 
gation to determine the standard of life of the laborers. 

I. Location. 

II. Study of the plant by departments. 

A. The following departments : 

Canning room, tin shop or canners' room, lithography, 
boning room, poultry room, sausage room, tank room, 
hog-killing, carpentering and brick masonry, hog-cut- 
ting. 

Supply Department — Sausage trimming, curing, smok- 
ing and pickling, laundry, hog-cleaning, ice plant, 
butterine, tin shop, fertilizer, hides, neutral, store 
room, packing and lard, car shops, machine shops, 
carpenter shops, paint shop, glue, fire department, 
cooperage, lard, box house, sheep, market pigs, beef 
killings, beef casing, new tank room, oleo oil, electric 
light plant, No. 3 engine house, local shipping, packing 
room, livery stable, roustabouts, unloading, beef load- 
ing. 

B. Study for the purpose of obtaining information in respec* 
to — 

1. Number of persons employed ( men, boys, women, girls, 

negroes ). 

2. Pay. (Compare as to sex, age, color, etc., for same work.) 

3. Moral character of employes. 

4. Length of time employes have been at the same work. 

5. Kind of men, as to intelligence, industriousness, and 

sobriety. 

6. Membership in lodges or societies, life insurance. 

7. Provision made by owner for comfort and health of em- 

ployes. 

8. Healthfulness of different kinds of work. 

9. Summary and conclusions drawn. 



ECONOMICS. 635 

III. Study of surroundings and places of living. 

A. Restaurants and eating-houses. 

1. Company restaurant. 

2. Other restaurants. 

3. Saloons. 

B. Homes of employes ( in west bottoms ). Noted as to — 

1. Cleanliness. 

2. Crowded condition. 

3. Sources of supplies. 

4. Rents. 

5. Character of persong. 
C Gambling-houses. 

D. "The Patch." 

E. Churches. 

F. Schools. 

IV. Suggestions for needed improvements. 

Example 8. The Municipal Government of Berlin. An economic 
investigation to determine the success of scientific methods of 
municipal government. 

I. Introduction. 

A. Location of city. On rivers. 

B. Rapid growth of city. Reasons for — 

(a) Location of the ruling families there. 

(6) Power of organization and scientific methods in public 
works 

II. Machinery of city government. 

A. Council. 

(a) Elected. 

1. Qualifications of electors. 
{h) Number of members — 126. 
(c) Power. 

1. Appoint Burgomeister (Mayor ). 

2. Choose committee of magistrates — 80. 

B. Police. 

(a) How appointed, 

1. Regular police by the State, and paid by the State. 

2. "Watchmen appointed and paid by the city. 
(5) Powers. 

1. Complete enforcement of all laws. 

2. Collection of full information in regard to all cit- 

izens, temporary or permanent. 



536 ECONOMICS. 

III. City government as found in municipal affairs, 

A, Means of communicatiot). 

1. Post. 

2. Post express. 

3. Pneumatic tube. 

4. Telephone. 

B, Means of transportation. 

1. Kinds. 

(a) Horse cars. 

(b) Electric cars. 

(c) Steam railway. 

2. Management. 

(a) Private ownership. 
(6) Regulation by the city. 

3. Methods of construction. 

C, Street pavements. 

1. Construction, 

2. Care. 

D, Care of public health, 

1. Cleaning of streets. 

2. Sewerage system, 

3. Park system. 

4. Disinfectant houses. 

5. Meat inspection. 

6. Water-supply. 

7. Supervision of building constructioE.. 

E, Lighting, 

1, Gas — city and private company. 

2, Electric — private company, 

F, Granting franchises, 

1. Gas. 

(a) Eeservations by the city, 

(b) Per cent, of receipts required by city, 

(c) Privilege of city to extend service at will. 
{d ) Regulation of charges. 

(e) Eight to purchase by city. 

2, Railway, 

{a) Bonus to city, 

(b) Yearly percentage of earnings to city. 

(c) Passes to city after certain length of time, 

G, Care of poor^ 



ECONOMICS. 537 

IV. Conclusion. 

A. City of Berlin a business corporation. 

B. Lessons drawn for American cities. 

1. Economy in all departments. 

2. Necessity for business ability and methods. 

3. Should not be a political machine. 

Example 9. The Prussian Railroad System. 

I. History of the Prussian railroad system. 

II. Laws regulating the public carriers, especially railroads. 

III. Laws relating to the construction and operation of railroads. 

IV. State and private ownership of railroads. 

1. How state ownership was brought about. 

2. Number of miles operated by the state. 

3. Number of miles operated by private corporations. 

4. Advantages and disadvantages of the state system. 

V. Tariffs. 

1. Freight. 

A. Classification of freight tariff and freight. 

2. Passenger tariffs or fares. 
A. Classification. 

3. Earnings — gross, net, gross passenger, net passenger, 
gross freight, net freight. 

VI. Expenditures. 

1. For extension of roads or construction of new lines. 

2. For repair of tracks, bridges, etc. 

3. For maintenance of road-bed. 

4. For new depots and repairs to old ones. 

6. Purchase, construction and repairing of engines. 

6. Purchase, building and repairing passenger and freight 

cars. 

7. Salaries. 

VII. Employes. 

1. Classification of employes. 

A. Officers. 

B. Clerks. 

C. Workmen. 

2. Wages of employes. 

3. Laws relating to employes. 

A. As to entrance into the service. 

B. As to length of service. 



638 



ECONOMICS. 



0. As to promotion. 

D. As to privileges. 

E. As to dismissal. 

F. As to operation. 

G. Education. 

H. Length of working day or working period. 

VIII. Hospitals. 

IX. Libraries, reading-rooms, etc. 

X. Industrial schools. 

XI. Other educational institutions for training of employes, 

nurses, etc. 

XII. Statistical tables to accompany each of the above subjects, 

BIBLIOGKAPHY. 

Government Ownership of Eailroads. Forum, Vol. XVIII, p. 704. 
Prussian Railroad System. G. Oohan. J. Pol. Sc, Vol. I, p. 179. 
Eisenbahnen (Prussian system). H. Conrad. J. Pol. Sc, Vol. Ill, 

pp. 147-223. 
State Ownership. Gunton's Mag., Vol. Ill, p. 52. 
Prussian Railroad System. Annals Amer. Acad., Vol. Ill, p. 389. 
Railroads and the State. Ghau., Vol. Ill, p. 413. 
Government Ownership of Railroads. Cosmopolitan, Vol. II, p. 

365. 
Government Ownership of Railroads. J. Soc. Act. , Vol. IV, pp. 

391-645, 662. 
Government Ownership of Railroads. Nation, Vol. LI, p. 205. 
Government Ownership of Railroads. Eng., N. Y., Vol. I, pp. 

592-741. 
Prussia and Pruss. R. R. System. Eng. N. Y., Vol. I, p. 236. 
Prussia and Pruss. R. R. System. Nat., Vol. XXVIII, p. 298. 

Prussia and Pruss. R. R. System. Nat., Vol. XXXIII, p. . 

Prussia and Pruss. R. R. System. Nat., Vol. XXXIV, p. 224. 
Prussia and Pruss. R. R. System. Nat., Vol. XXXVI, p. 100. 
Prussia and Pruss. R. R. System. J. Soc. Acts, Vol. XIV, p. 34-197. 
Prussia and Pruss. R. R. System. Nat., Vol. XXXVII, p. 137. 
Russia. Chambers, J., Vol. XVIII, p. 177. 
Russia. Chambers, J. M., Vol. V, p. 335. 
Russia. Fortnightly Mag. , Vol. XXV, p. 67. 
Comparative Railroad Statistics. Prus. Pract. Mag., Vol. V. 
Austrian Railroad. Annals. Am. Acad. Pol. Sci., Vol. I, p. 345. 
History of the German Empire. Von Sybel, Vols. I, II, III. 



ECONOMICS. 539 

Consular Reports, Nos. 170, 186, 189, 205. 
Highways of Commerce. Consular Reports, Vol. XII. 
The Prussian Railroad System. Carrol D. "Wright, Pub. Bureau of 
Statistics and Labor. 

The following additional topics for investigation are given for 
students : 

The legal status of trusts. 

The economic effect of trusts. 

The economic effect of excessive life insurance. 

The economic advantages of speculation. 

The evil effects of illegitimate speculation. 

To what extent is a labor organization a trust ? 

The question of strikes. 

Effect of labor organizations on wages. 

An inquiry into the standard of life of laborers. 

Economic effect of irrigation. 

Consumption of laborers. 

The economic effect of suburban and rural electric lines. 

Monopoly and monopoly profits of railroads. 

Excessive capitalization of " industrials." 

The wages of miners in relation to the price of coal, etc., etc. 

(This list may increased as needed.) 



IliTDEX. 



Abstinence, 115, 

Adam Smith, 40, 48, 49, 65, 444; 
on taxation, 468. 

Ager publicus, 98. 

Agriculture, 22 ; and transpor- 
tation, 83; laws of income 
from, 79; limited returns of, 
81. 

Agricultural area in the United 
States, 86; products, variety 
of, 88. 

American federation of labor, 
223. 

American railway union, 225. 

Anarchism, 252. 

Animals, domestication of, 22. 

Aquinas, Thomas, 178. 

Arbitration, 237 ; compulsory, 
238; in England, 238; in 
New Zealand, 238; volun- 
tary, 238. 

Aristotle, on interest, 177; pol- 
itics of, 241. 

Assessment, inequitable, 498. 

Augustine, St., City of God, 243. 

Babeuf, 247. 

Balance of trade, 366. 

Bank of England, 349; of 
France, 350. 

Bank notes and paper money, 
340. 

Banks, as centers of business, 
347; national, 351; postal 
savings, 355 ; savings, 355. 

Banking, condition of, 354; sys- 
tem, a sound, 348; rise of, 
347. 

Belgium, defectives in, 103. 



Bimetalism, 339. 

Blanc, Louis, 252. 

Boehm-Bowerk and interest, 181. 

Budget, the, 503. 

Bullock, waste of foods, 288. 

Cabet, Etienne, 248. 

Cairnes, 49. 

Canadian banking system, 354, 

Canonists and interest, 178. 

Capital, accumulations of, 118; 
circulating, 116; concrete, 
118; economic significance of, 
120; fixed, 116; free, 117; 
momentum of, 119; nature 
of, 114; organization of, 30; 
pure, 118; specialized, 117. 

City and farm population, 87. 

Civilization and the land ques- 
tion, 77. 

Combinations, 124. 

Commerce, 24; legislation in 
favor of, 445 ; of nations, 420. 

Commercial crises, 369. 

Commons, on monopolies, 152. 

Communism, modern, 247. 

Comparative table of expendi- 
tures, 278. 

Competing groups, 169. 

Competition and demand, 299; 
free, 27 ; in groups, 29 ; plane 
of, 446. 

Conciliation, 238. 

Consumer's profits, 273. 

Consumption, analysis of, 275; 
final, 272; immediate, 272; 
inseparable from production, 
270; in the United States, 
284; lack of economy of, 90; 



(541) 



542 



INDEX. 



national, 283; productive, 
273; reform of, 285; regu- 
lates production, 269; waste 
in, 287. 

Cooley, on taxation, 464. 

Cooperation, aim of, 204; con- 
scious, of society, 20; distrib- 
utive, 193; distributive, in 
England, 195; distributive, in 
France, 196; in United States, 
202; nature of, 193; princi- 
ples of, 216; productive, 194; 
unconscious, of society, 18. 

Corporate farming, 91. 

Corporation, the, 123; laws con- 
trolling, 452; taxation of, 
473. 

Cost of production, 321; of pro- 
duction and rent, 160. 

Court of visitation, 418. 

Covarruvias on interest, 178. 

Cradock on taxation, 473. 

Craft guilds in England, 219. 

Credit, 343; advantages of, 344; 
and value, 344; creates capi- 
tal, 345; instruments of, 343; 
overstrained, 346. 

Currency, inflation of, 346, 374. 

Debts, public, 484, 

Demand and competition, 299; 

law of, 296; schedule, 294. 
Distribution, dynamic law of, 

137; nature of, 132. 

Economic effect of machinery, 
89; experiment, 263; free- 
dom, 435; goods, 202; inves- 
tigation, 491 ; organization, 
24; process, unity of, 61. 

Economic life, and political 
economy, 33; simplicity of 
early, 21; nature of, 17. 

Economics and ethics, 53; and 
politics, 54; and sociology, 
55; concrete, 49; outlines of, 
44; practical, 50; private, 
54; public, 54; pure science 



of, 47; trend of modern, 40; 
wide range of, 35. 

Economy of consumption, 90. 

Eight-hour law, 111. 

Ely, kinds of money, 331; on 
taxation, 467. 

Engel's law, 275. 

England, efficiency of labor, 103 : 
defects in, 103. 

Equal returns, law of, 135. 

Ethics and economics, 53. 

Exchange, beginnings of, 323; 
domestic, 360; foreign, 361; 
importance of, 358; means of, 
359; organization of, 357. 

Expenditure, 281; percentage 
of, for families of different in- 
comes, 278; public, 600. 

Farm and city population, 87. 

Farmers' alliance, 196, 202. 

Farming, corporate, 91. 

Field work, 493. 

Finance, development of, 488. 

Firm, the, 123. 

Fisheries, 96. 

Fishing, 21. 

Forests, 96, 

Fourier, 251. 

France, efficiency of labor in, 

103; defectives in, 103. 
Franchises, disposal of public, 

434; tax on, 461. 
Free goods, 302; trade, 421. 
French school, 65; revolution, 

the, 246. 
Futures, trade in, 401. 

Gambling, why detrimental, 399. 

Gas-works, municipal ownership 
of, 432. 

George, Henry, interest, 179; on 
natural distribution, 133. 

German school, 49. 

Germany, efficiency of labor, 103 ; 
defectives in, 103. 

Giffen, opinion on trade depres- 
sions, 394. 



INDEX. 



i43 



Government by injunction, 460 ; 
conservative, 245 ; machinery, 
imperfections of, 506 ; manage- 
ment, 453 ; ownership, 453. 

Grange, the, 196, 202. 

Gross product, how distributed, 
138. 



Hadlet, on pooling, 433. 
Hebden Bridge manufacturing 

company, 198. 
Hermann, interest and wages, 

180. 
Hildebrand, 49. 
Hobbs on taxation, 473. 
Human wants, variety of, 270. 
Hunting, 21. 



ICARIA, 249. 

Immigration, restriction of, 112. 

Inadequacy of socialism, 257. 

Income tax, 474, 477 ; objections 
to, 515. 

Indirect taxes, 483. 

Industrial stage, 25 ; revolution, 
26. 

Industries, public control of, 
449 ; by commissions, 450. 

Industry, regulation of, 446 ; re- 
striction of, 445. 

Inheritance tax, 474. 

Italy, defectives in, 103. 

Insurance, 405. 

Interest, as a factor in distribu- 
tions, 186 ; economic, 175 ; ef- 
fect of cheap money, 184 ; laws 
regulating, 184 ; loan, 175 ; 
nature of, 175; premium on 
exchange, 181 ; theories of, 176. 

Interstate commerce commission, 
418. 

Investigation, accounting and 
comparing, 521 ; condition of 
packing-house employes, 534 ; 
canals in their relation to rail- 
roads, 532 ; economic purpose 
of, 517 ; examples of methods, 
522 ; examples of, 522 ; gath- 



ering material in, 518 ; histori- 
cal, 514 ; interstate commerce 
law, 529 ; note-taking, 520 ; 
municipal government of Ber- 
lin, 535 ; productive coopera- 
tion in England, 533 ; Prussian 
railroad system, 537 ; railroad 
rates, 524 ; railroad accidents, 
530 ; of the labor question, 
523 ; scope of economic, 516 ; 
topics for, 538. 
Irrigation, 92 ; and panics, 94 ; 
general results of, 95. 



Kettering Boot and Shoe Co., 

201. 
Knies, 49. 
Knights of Labor, 225. 



Land, area, 82 ; offices of land, 
76 ; and population, 78 ; or 
nature, 75 ; tenure, 98. 

Labor, cooperation of, 106 ; di- 
vision of, 106 ; grades of, 104 ; 
improved conditions of, 108 ; 
laws of, 110; legislation, 445; 
organization of, 109 ; price 
plan, cooperation of, 105 ; 
productivity of, 108 ; protec- 
tion of, 110 ; service of, 101. 

Labor force, extent of, 102 ; qual- 
ity of, 103. 

Labor organizations, 31 ; effect- 
iveness of, 236 ; origin of, 218. 

Lassalle, Eerd., 254. 

Lecky on prosperity of a nation, 
268. 

Leroy-Beaulieu, on taxation, 464. 

Library, material, classification 
of the, 512. 

Limited returns, 158. 

Local government and reforms, 
262. 

Luxury, 280. 



Machinery, economic effects of, 
89. 



544 



INDEX. 



Maltlius, 49. 

Malthus, theory of food-supply 
and population, 92. 

Managing class, the, 188. 

Manufactures, 23. 

Margin of cultivation, 159. 

Marginal utility, 295. 

Market, the, 360; demand, 
298; interferences, 313; price, 
318. 

Marx, Karl, 254; no rational 
cause for interest, 180. 

McCallock on interest, 179. 

McKinley bill, 383. 

Menger, interest and wages, 180. 

Mercantilists, 443. 

Mill, J. S., 49, 65; on taxation, 
448. 

Mill, James, on interest, 179. 

Money, 323; amount needed, 337; 
early history of, 323 ; deferred 
payments, 334; functions of, 
332; kinds of, 331; measure 
of value, 332; multiple stand- 
ard, 334; principles of circu- 
lation, 336 ; standard of value, 
333; storage of value, 335. 

Monetary history of the U. S., 
340. 

More's Utopia, 243. 

Moreillet, 247. 

Monometalism, 338. 

Monopolies, artificial, 151; nat- 
ural, 151; restriction of, 446. 

Monopoly, benefit of, for the peo- 
ple, 447; in land, 85; prices, 
191; privileges, 150; profits, 
191, 126, 418. 

Moses, as an organizer, 240. 
Mun, on taxation, 473. 

National banks, 351 ; organiza- 
tion, 351; regulation, 352. 

Nature, bounties of, 76. 

Nelson, N. 0. Co., 211. 

Net product, 131; divisions of, 
133; undivided, 135. 

Normal price, 318. 



Norway, defectives in, 103. 

Organization, private, 122; and 
increased productivity, 129. 

Organized labor, effect on pro- 
duction, 127. 

Owen, Robert, 195, 254. 

Panics, 375; approaching, 378; 
and tariff, 383; in the U. S., 
384; management of, 392; of 
1893, 390; precipitation of, 
380; prevention of, 392. 

Paper money, 339; and bank 
notes, 340. 

Partnership, the, 123. 

Petty on taxation, 474. 

Physiocrats, 65, 444. 

Political economy, objects of, 57 ; 
method of study, 57 ; a science, 
38 ; arises from, 34 ; definition 
of, 39 ; and economic life, 33 ; 
field of, 42; liberal conception 
of, 43; narrow conception of, 
43; problem of, 51; principles 
and laws of, 37; subjective 
boundary of, 43 ; treats of, 34. 

Political organization, effect on 
values, 129. 

Politics and economics, 54, 55. 

Poll tax, 474, 476. 

Population and food-supply, 93; 
and land, 78; farm and city, 
87. 

Plato's Republic, 241. 

Price, 310; market, 310; nor- 
mal, 321. 

Prices, and rent, 159; causes of 
law, 381; equalized, 408; lim- 
itation of, 320; movement of, 
376. 

Proctor & Gamble Co., 206. 

Production, character of, 62; es- 
sential factors of, 71; means 
of increasing, 73; processes of, 
70. 

Producers, who are, 4, 65. 
1 Profit-sharing, 206. 



INDEX. 



545 



Profits, and the law of rent, 147 ; 
and rent, 189 ; and competi- 
tion, 188 ; gross, 187 ; pure, 
187 ; pure, and market prices, 
190. 

Protective tariff, 484, 485. 

Progress, nature of, 265. 

Property, riglits of, 148. 

Proudlion, 253; "property is 
robbery," 180. 

Public debts, 484. 

Public expenditure, 500. 

Public economics, significance of, 
462. 



Rate on loans, 182. 

Railroad, commissions, 437 ; gov- 
ernment ownership of, 450 ; 
management, 433 ; abuses of, 
433 ; problems, 432 ; rates, 
436 ; statistics, 434. 

Reform, no formula for, 266. 

Rent, 153 ; and free land, 162 ; 
and prices, 159 ; economic sig- 
nificance of, 163 ; causes of, 
154 ; contract, 153 ; economic, 
153 ; how arises, 155. 

Residual claimant, 146. 

Revenues, methods of collecting, 
490. 

Ricardo, 49. 

Risk, compensation for, 396. 

Rochdale pioneers, 196. 

Rodbertus, 254 ; no rational 
cause for interest, 180. 

Rogers, Thorold, on trade unions, 
228. 

Roman practice in government, 
243. 

Roscher, 65 ; occupation of labor, 
101. 



Savings, 279 ; desirability of, 

281 ; and abstinence, 115. 
Savings banks, 355. 
Say, interest and wages, 180. 
Seligman, on taxation, 474. 
Senior, 49. 



Sherman, John, on taxation, 469. 

Single tax, 495. 

Socialism, and the gospel, 263 ; 
claims of, 239 ; in America, 
255 ; modern, 250 ; German, 
254. 

Social order, adjustments of, 240. 

Social organization, effects of, 
56. 

Soil, difference in fertility of, 
157. 

Speculation, 396 ; illegitimate, 
397 ; in productive industry, 
403 ; legitimate, 397 ; moral 
and economic effects, 404 ; 
remedies, 405. 

Spending, 279. 

State, the, and industry, 31. 

State socialism, 252, 461. 

Strikes, result of, 233. 

Supply, laws of, 316. 

Sweden, defectives in, 103. 

Sweating system, 286. 



Tariff, 484, 485 ; and panics, 
383. 

Tax, direct, 476; income, 474, 
477 ; inheritance, 482 ; fran- 
chise, 481 ; land and income, 
497 ; personal property, 481 ; 
poll, 476 ; real property, 480 ; 
single, 495. 

Taxation, canons of, 468 ; devel- 
opment of, 488 ; double, 491 ; 
economic idea in, 451 ; inci- 
dence of, 473 ; just and equi- 
table, 453 ; modern imperfec- 
tions of, 489 ; of corporations, 
494 ; principles of, 468-9 ; re- 
lation to private economics, 
453 ; definition of, 464. 

Taxes, indirect, 483 ; classifica- 
tion of, 475 ; inequitable as- 
sessment of, 498 ; methods of 
collection of, 500. 

Tellez, Gonzalez, on interest, 178. 

Terminology, mistakes in, 52, 

Territory, extension of, 81, 



646 



INDEX. 



Trade, 23; balance of, 366; 
courses of, in depressions, 372 ; 
cycle, 371; depression, 370. 

Trade unions, development of, 
222; influence on wages, 235; 
objects of, 227. 

Transportation, and agriculture, 
83; advantages of water, 410; 
neglected, 411; effect of on 
prices, 408 ; effect of on indus- 
try, 409; economic value of 
cheap, 409. 

Trust, the modern, 455; evil ef- 
fects of, 458; objection to, 457, 
459. 

Trusts, 124; taxation of, 461. 

Turgot, fructification theory of 
interest, 179. 

Unionism, mistakes of, 229. 
United States, land policy of, 84; 

agricultural area of, 86. 
Utilities, creation of, 36. 
Utility, 293. 

Vacuna, Vaconius, on interest, 
178. 

Value, 300 ; difference of opinion 
of, 301 ; and utility, 302 ; in- 
trinsic, 305; objective, 306; 
subjective, 306; utility the 
cause of, 306; theories of, 304. 



Values, international, 362. 
Venice, Bank of, 347. 

Wages, economic significance of, 
174; scientific law of, 169; 
residual-claimant theory, 167; 
iron law of, 167; determina- 
tion of rate of, 166; increase 
of, 173; improved by legisla- 
tion, 173; and business sense, 
171; and philanthropy, 172; 
and eight-hour day, 172; and 
variability of gross product, 
143 ; laws of, harmonized, 146 ; 
labor the cause of, 164; pure, 
164; gross, 164; real, 164; 
nominal, 164. 

Walker on profits, 147; defini- 
tion of money, 331. 

Wage-fund theory, 16. 

Wagner, problem of political 
economy, 51. 

Want, degrees of, 271. 

Wants, satisfaction of economic, 
271. 

Waste, 281. 

Water-works, municipal owner- 
ship of, 452. 

Wealth, creation of, 63; getting 
and using, 35; getting, tech- 
nology of, 35; non-capital, 
115; conditions of producing, 
71; struggle for, 293. 



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ELEMENTARY PRINCIPLES OF ECONOMICS 

By Richard T. Ely, University of Wisconsin, and George Ray Wicker, 

Dartmouth College. 

This work combines material for teaching both economic history 
and economic theory, each being made to supplement the other. It 
is clear, concise, concrete, and copiously illustrated. 

Cloth, half leather i2mo vii + 388 pages $1.00 net 

OUTLINES OF ECONOMICS 

By Richard T. Ely, Professor of Political Economy and Director of the 
School of Economics, Political Science, and History in the University 
of Wisconsin. 
Citizen's Library Cloth, leather back xii + 432 pages $1.25 net 



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MAR 26 1907 



